Bank Earnings Season: What Top Performing Community Banks Say About Banking and the Economy

This year in April I had Copilot analyze the earnings releases of the big four banks to give us signals on the US banking industry and economy. 

This earnings season, I selected five community banks from a list of nationwide, publicly traded banks between $1 billion and $25 billion for their signals as to the strength of the banking industry and health of the economy. The five chosen were in the top 25 banks in return on average assets and from different regions of the country. 

Cherry picking high performers and limiting Copilot's learning to their investor releases, which tend to be more optimistic (read 2006-07 earnings releases and investor presentations) than candid conversation, might not look strongly enough at the negatives. But it is clear that even community banks are not feeling economic headwinds right now. Which could be a great time to ensure balance sheets are prepared for economic headwinds. 

That said, here is what they collectively and summarily had to say.

Banking Industry & Economic Read-Through: What Five Community/Regional Banks Are Saying

Copilot reviewed recent earnings releases, investor presentations, and investor disclosures published during the last roughly three months by Tompkins Financial, City Holding Company, ServisFirst Bancshares, F S Bancorp, and West Coast Community Bancorp. While these institutions operate in different markets, their commentary is remarkably consistent and provides a useful lens into current banking and economic conditions.

Executive Summary

The collective message from these five banks is:

• Loan demand has improved materially, especially commercial lending and owner-occupied real estate.
• Deposit competition has eased, helping net interest margins stabilize or expand.
• Credit quality remains exceptionally strong, with no evidence of broad-based deterioration.
• Commercial real estate concerns appear manageable at community and regional banks with relationship-based portfolios.
• Economic activity remains resilient, although management teams continue to monitor policy uncertainty, inflation, and business investment trends.
• Capital and liquidity positions are strengthening, giving banks more flexibility for dividends, repurchases, and growth initiatives.

1. Loan Growth Is Reaccelerating

The strongest common theme across all five institutions is renewed loan growth.
Tompkins Financial management reported:

• Loans increased 6.9% year-over-year
• Quarterly annualized loan growth exceeded 7%
• Management highlighted "healthy levels of loan and deposit growth" supporting record profitability.

ServisFirst Bancshares was among the most bullish banks reviewed:

• Annualized loan growth exceeded 15%
• Management stated virtually all markets contributed to growth
• Florida, Tennessee, Houston and Texas were particularly strong
• Loan pipeline reached a record level.

F S Bancorp

• Loans increased from $837 million to $911 million, an 8.8% increase year-over-year.
• Management described core earnings and loan demand as strong.

West Coast Community Bancorp CEO Krista Snelling emphasized:

"solid loan and deposit growth" despite earnings being impacted by debt redemption expenses.

City Holding Company
City's loan portfolio continued to expand while loan yields improved modestly.

Industry Read-Through

Businesses appear increasingly willing to borrow after a prolonged period of rate uncertainty.
This suggests:

• Investment activity is improving.
• Middle-market companies are not behaving as though a recession is imminent.
• Borrower confidence has improved versus 2023-2025 conditions.

2. Margin Pressure Has Bottomed

A year ago, many banks were fighting for deposits and experiencing margin compression.
That trend appears to be reversing.

Tompkins Financial

• Net interest margin reached 3.58%
• Up 50 basis points year-over-year
• Cost of funds declined versus prior year.

ServisFirst Bancshares

• Net interest margin expanded to 3.63%
• Management expects further expansion.
• Deposit pricing discipline remains a major driver.

City Holding Company

• Net interest margin held steady at an impressive 3.97%
• Net interest income continued increasing.

FS Bancorp

• Net interest income rose approximately $1.8 million year-over-year.

Industry Read-Through
Banks generally indicate:

• Deposit betas are cooling.
• Funding costs are stabilizing.
• Asset yields remain attractive.

This is one of the healthiest margin environments community banks have seen since rates began rising.

3. Credit Quality Remains Surprisingly Strong

Perhaps the most important observation is that none of these banks are reporting widespread stress.

City Holding

• Nonperforming assets improved from 0.27% to 0.24%.
• Past dues remained only 0.19% of loans.

ServisFirst
Management stated:

• No systemic weakening is visible.
• Nonperforming assets declined.
• Charge-offs remain modest.
• Loan loss reserves remain stable.

F S Bancorp

• Delinquencies were only 0.08% of loans.
• Quarterly net charge-offs totaled just $1,200.
• A $4.9 million problem credit paid off in full.

Tompkins
While provision expense remains elevated relative to 2024 levels, management continues to characterize the balance sheet as healthy and well-capitalized.

Industry Read-Through
The feared wave of credit losses from higher rates has not materialized among these banks.
What we're seeing instead:

• Consumers remain current.
• Small business borrowers continue to perform.
• CRE portfolios are generally holding up.

4. Deposits Are Stable to Growing

Deposit stability is another major positive.

Tompkins - Deposits increased 4.7% year-over-year.
FS Bancorp - Deposits remained near $1.2 billion. Deposit mix improved as time deposits declined and relationship deposits increased.
West Coast Community Bancorp - Management highlighted continued deposit growth throughout the quarter.
ServisFirst - Deposit growth accompanied strong lending growth while maintaining margin expansion.

Industry Read-Through
Deposit migration concerns that dominated discussions in 2023 and early 2024 appear largely behind these banks.

That is important because:

• Deposit retention supports earnings.
• Liquidity risk declines.
• Banks can fund loan growth internally.

5. Capital Positions Are Strengthening

Several institutions highlighted stronger capital metrics.

Tompkins - Tier 1 leverage ratio increased to 10.69%.

West Coast Community Bancorp - Management emphasized: Strong capital ratios; No outstanding borrowings; Capacity for future growth and dividend increases.
F S Bancorp - Equity increased substantially year-over-year; Repurchased stock while maintaining dividend growth.

Industry Read-Through
After the banking stress period of 2023, institutions have spent several years rebuilding liquidity and capital. These disclosures suggest many community banks are now operating from a position of strength.

6. Regional Economic Signals

Northeast (Tompkins) - Economic activity appears steady in New York and Pennsylvania with good commercial lending activity and improving profitability.
Appalachia/Mid-Atlantic (City Holding) - West Virginia and adjacent markets continue showing stable credit quality and strong profitability despite slower-growth demographics.
Southeast (ServisFirst) - The strongest growth story among the group. Management repeatedly pointed to Florida, Tennessee, Texas, and Houston as sources of exceptional loan demand.
Midwest (F S Bancorp) - Economic conditions support continued profitability and loan growth despite competitive funding markets.
California (West Coast Community) - West Coast Community remains optimistic on Central Coast and Silicon Valley markets and is actively expanding through private banking initiatives.

What This Means for the U.S. Economy

These five banks collectively point toward a soft-landing economic environment rather than a recessionary one.

• Evidence Supporting Economic Strength
• Commercial borrowing is increasing.
• Loan pipelines are growing.
• Credit quality remains strong.
• Deposits are stable.
• Net interest margins are improving.
• Capital levels are strengthening.
• Banks are increasing dividends and repurchasing stock.

Remaining Caution Signs Mentioned

• Inflation and interest-rate uncertainty.
• Potential policy and tariff impacts on business activity.
• Commercial real estate exposures requiring continued monitoring.
• General economic uncertainty affecting investment decisions.

Key Takeaway for Readers

My headline from Copilot's take would be:

The operating environment has improved meaningfully. Margin recovery, renewed loan growth, stable deposits, and resilient credit performance have largely replaced the liquidity and funding concerns that dominated banking discussions over the previous two years.

The most notable signal from these five institutions is not merely that conditions are stable, but that management teams are increasingly discussing growth opportunities rather than defensive balance-sheet management. That is typically a late-cycle positive indicator for both the banking sector and the broader U.S. economy.

My cautionary note is that I chose high performing banks through a five-year cycle. A soft landing or mild recession usually presents opportunities for strong management teams as banks with weaker balance sheets try to fortress them in the midst of economic headwinds, leaving many good customers in the lurch. 

Is the FDIC Summary of Deposits Pure Fiction?

For decades, FDIC deposit market share data has been one of the banking industry's most important tools for assessing competitive position. It is relied upon by regulators, banks, consultants, and investors to measure market presence and evaluate branch expansion opportunities. However, analysis of two Pennsylvania counties, Lackawanna and Luzerne counties, suggests that the traditional branch-based methodology may be becoming increasingly disconnected from how households actually manage their savings.

These counties offer an interesting case study. Between 2021 and 2026, the number of households increased from approximately 220,300 to 225,000, representing modest but steady growth. At the same time, FDIC-reported deposits attributed to physical bank offices in the two counties increased from roughly $15.8 billion to $16.1 billion. Deposits per household, however, remained essentially flat, moving from approximately $71,870 to $71,490. The compound annual growth rate of deposits per household was actually slightly negative, while household growth exceeded total deposit growth.

The most striking trend may not be growth rates but rather the declining importance of physical offices themselves. The number of bank branches included in the market fell from 177 offices in 2021 to 157 in 2026, an 11% decline. Yet deposits remained relatively stable. This suggests deposits are becoming less dependent on branch proximity and more dependent on digital relationships, brand strength, rates, and product offerings.

The below table indexes 2021 to 100 to demonstrate what I just described.

This raises a fundamental question: what exactly does FDIC deposit market share measure today?

The FDIC Summary of Deposits system attributes deposits to physical banking offices. That methodology was highly logical when households overwhelmingly banked at institutions with local branch networks. 

Today, however, consumers routinely place funds with institutions that may have no branches in their county, state, or even region. Online banks such as Ally Bank and SoFi Bank compete directly with community and regional banks for deposits while maintaining little or no branch infrastructure. 

Similarly, consumers increasingly hold cash-equivalent assets in brokerage sweep accounts, money market mutual funds, Treasury bills, and other vehicles that sit entirely outside traditional deposit market share calculations.

As a result, a bank's reported deposit market share within a county may tell us where deposits are booked rather than where residents actually store their wealth. A community bank could maintain a stable branch-based market share while losing household wallet share to online banks and investment platforms. Conversely, an online institution could have substantial relationships with local households while appearing to have no market presence at all.

The competitive implications are significant. Regulators use deposit market share extensively in merger and acquisition analysis. Yet if a growing percentage of household savings resides outside locally reported branch deposits, concentrations based solely on branch data may overstate actual market power and understate competition. The market experienced by consumers is increasingly national, not local.

A potential solution would be for banks and credit unions to report deposits based on the ZIP code of the depositor's residence or business location rather than solely the location of the branch where balances are assigned. While implementation would require some data cleanup and privacy safeguards, the resulting information would provide a much more accurate picture of where households and businesses actually place their money. It would also allow banks to make better strategic decisions and regulators to better evaluate competition from digital banks, credit unions, and other federally insured institutions that operate without extensive branch networks.

The Lackawanna-Luzerne data support this theory. Household growth has continued, branch counts have fallen, and deposits per household have not grown. All this while inflation rose a total of 23% since 2021, and money supply (M2) has grown 2.3%, and banks cost of deposits averaged 1.5%-2% annually. Aggregate deposit growth in Lackawanna-Luzerne was less than the interest paid on those deposits.

Those trends are consistent with a banking system in which physical location is no longer the primary determinant of deposit gathering. As banking becomes increasingly digital, a branch-based deposit market share framework may be measuring yesterday's competitive landscape rather than today's reality. The next evolution of market share reporting may require shifting focus from where deposits are booked to where depositors actually live.

Let's make the change.

~ Jeff

 

Guest Post: Financial Markets and Economic Update for the Third Quarter 2026

Bond Vigilantes

When the bond market leads the Federal Reserve, they usually must follow or face the wrath of the bond vigilantes.  They’re back!  The Fed Funds futures markets had a 94% chance of a rate hike at the September 16^th FOMC meeting.  The 2-year Treasury yield rose by 61 basis points since the end of the second quarter; the 10-year Treasury rose by 60 basis points and exceeded 5.00% as of now.  The FOMC unanimously raised the Fed Funds rate by 25 basis points to 3.75% to 4.00%, for the first hike since July, 2023.  Be careful what you wish for as the Fed rarely stops at one single increase in Fed Funds once they start tightening.

The bond vigilantes have been protesting all quarter, but especially in September.  They pushed rates up to combat inflation uncertainty, high oil ($102), gas ($4.47), and diesel ($6.44) prices because of the Ukraine war and Iran conflict (or should I call it a standoff?), and rising commodity prices (supporting the dollar).  Global debt is rising as capital investment for AI and manufacturing plant buildouts increases demand for long term debt.  The federal government deficit has pushed Treasury issuance up with $40 trillion+ now outstanding.  Or maybe the vigilantes are just protesting Maria Bartiromo’s exit from Fox News on September 3rd.

So, bond vigilantes, what’s next for the 10-year Treasury yield?  4.50% or 5.50%?

Inflation

With the new Fed Chairman, Kevin Warsh, now in place, I am watching Fed news conferences again.  When asked why the Fed projections still show it would take two years to get to the PCE goal (as I’ve been complaining about for years), Warsh almost laughed.  He simply said inflation is too high and we must get to the 2.0% goal in a quicker, more timely fashion.  At 3:00, he answered a question, snatched his papers, and abruptly walked out.

I agree that inflation measures year-over-year are too high, as evidenced by CPI (August) at +3.4%, PPI (August) at +5.4%, and PCE (July) at +3.7%.  Core CPI (August) was at +2.4% (which is at the implied target), core PPI (August) at +4.6%, and core PCE (July) at +3.3%.  In the 2s for all would be infinitely better.

There are measures that are much lower- Truflation, which is a set of indices developed in December 2021 to replicate CPI and PCE, but digitally in real time for 13 million goods and services on a daily basis, eliminating the survey process for thousands of prices and delays of the standard CPI and PCE measures.  As of September 18^th, Truflation y-o-y for CPI was +2.4% versus the standard CPI at +3.4% and for PCE was +2.5% versus the delayed +3.7%.  Truflation has been under 3.0% for all of 2026.  For Bloomberg users, the ticker is TRUFUS44.  Let’s hope the Fed task force on inflation at least considers this metric.  What do you think about Truflation?

Rogue AI

We’ve heard about several instances of AI models breaking their containment or testing environment and going where they should not go- to the Internet and onto companies’ websites.  Open AI’s agent escaped the test environment, got onto the Internet, and hacked the servers of Hugging Face.  Google’s Gemini hacked and accessed three real companies’ websites by obtaining or guessing passwords.  Anthropic’s Mythos and Meta’s Llama both broke out of their containment and Mythos uploaded malicious software to a site.  Alibaba’s AI model found sites on the Internet and started mining cryptocurrency.  What next?  It’s clearly a risk that companies and individuals must contemplate sooner rather than later.

Some of My Favorite Economic Indicators

Leading Economic Indicators (LEI)- The up and down pattern of 2026 continues.  August’s LEI was -.1%, July was +.2%, and June showed no change.  In the past 42 months, 33 months were negative, 5 months had no change, and 4 months were positive (all in 2026).  Recent trends are not telling us much about future growth.  The many months of downturn over the past 3.5 years didn’t tell us much about growth either, as the LEI kept pointing to recession that never came.

Real GDP- Speaking of growth, it’s been holding in there, with 2Q26 at +2.1% and 1Q26 at +1.5%.  As far as the 3Q26 projections by the Atlanta Fed, GDP Now stands at +5.1% as of now.

Moody’s Beige Book Index- The most recent report for September showed 10 districts with increasing growth and two with unchanged growth.  Philadelphia is increasing this time.  The Moody’s Beige Book index is higher again in September at 63.9, compared to 44.4 in July and 36.1 in June.

M2 Money Supply- M2 y-o-y growth has been solid.  July was +5.4%, June was +5.3%, May was +5.4%, and April was +4.5%.  This increase in money supply is supporting GDP growth.

Productivity- This measure improved in 2Q26 to +1.4%, following +.8% in 1Q26.  Unit labor costs were modest at +1.2% and +1.3% in 2Q26 and 1Q26, respectively.  Productivity is at a level now that can support a portion of wage increases.

Housing- Prices continue to moderate on a y-o-y basis.  Case Shiller was +2.1% in June versus May of +1.6%.  FHFA for June was +2.3% versus May of +2.4%.  Moody’s HPI was +1.9% in July versus June of +2.2%.  Existing home median sale prices rose +1.6% in August.

Federal Reserve Task Forces

“It’s been a long time coming but I know a change is gonna come.”  Sam Cooke

Kevin Warsh is forcing change at the Fed.  Five task forces were created to study their subjects and report back by year-end 2026 at the latest.  These task forces are: 1. Communications (i.e. no press conferences!), 2. Balance sheet policy and management, 3. Quality and timeliness of data sources, 4. Productivity and costs including technology and AI, and 5. Inflation framework.

September 11^th

I can clearly remember that fateful day 25 years ago.  The feelings of dread, sadness, horror, and helplessness are still there.  The feeling of deep loss remains over the loss of my friends at Sandler O’Neill who were killed that day.  They were so proud of their offices on the 104^th floor of the South Tower.  Each year, on September 11^th, I think of them and vow to never forget them.  They went to work that morning and had no idea of the tragedy to come.  So here goes- Stacey, Gus, Herman, Chris, Jeff, Kevin, and Judd.  And to Anthony, who I met after the tragedy and who was not there that day, I think of you as well.  God bless you all.

Thanks for reading!  As always, I appreciate your support!  DLJ 09/20/26

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.

Deposits: Let's Talk

According to the Independent Community Bankers of America (ICBA), stablecoin wallets could suck $1.3 trillion, with a "T", out of the insured deposit system. Predominantly from banks. I'm thinking the ICBA would care less about deposits leaving credit unions.

The concern and the headline number is that if stablecoin becomes a widely adopted payment rail, like ACH, wires, and Visa/MC, and stablecoin issuers can offer rewards, then businesses and perhaps individuals will park more of their cash holdings in a stablecoin wallet. The other payments rails flow through banks, so the "wallets" are essentially the customer operating accounts.

Do I think the great vacuum sucking machine of deposits leaving banks for stablecoin wallets will come to fruition? Probably not, at least not at the levels projected. And the Clarity Act recently failed to pass the Senate, due in part to not closing the rewards loophole, more like a tunnel a freight train could pass through, left in the Genius Act that forbids the paying of interest to stablecoin providers but does not forbid rewards. 

And bankers are beginning to adapt. The Clearing House is developing a shared, bank‑led platform for clearing and settling tokenized deposits. It is designed to keep customer funds inside regulated bank accounts while adding on‑chain speed, programmability, and 24/7 settlement. A cadre of bank trade associations are doing the same in an initiative called Bank Chain. 

Even if the $1.3T is a huge miss, I think we're missing where there is titanic risk. The alternatives to bank deposits. Before I elaborate, let's look at past behaviors during different rate and pricing transparency in the recent past.

The above chart is a macro look at the spreads delivered by asset products, namely loans and investment securities, and liability products, primarily deposits, during different rate scenarios. The dotted line represents the Fed Funds Rate. The orange line, asset spreads. And the green line, liability/deposit spreads. Many of my readers know that my firm measures product profitability for community financial institutions on an outsourced basis and that is where I am getting these statistics from. Our outsourcing client averages.

In 2006, when the Fed Funds Rate was 5%-5.25%, as it was in 2023, deposit spreads actually exceeded asset spreads although deposits have negligible credit risk. At that time, there were nearly 100,000 bank branches nationwide.

Then came the Great Recession and the Fed Funds Rate fell to zero. Deposit spreads plummeted and lingered around 1% for the remainder of the zero-rate environment until the Fed started tightening in 2017. The number of bank branches plummeted to around 70,000. Why? Deposits were less profitable. Therefore branches were less profitable. And the declining number of customer visits to branches made them easy targets for consolidation. And as it turned out, there was little deposit attrition from consolidated branches. 

Because customers did most of their transactions online or on mobile. No branch. No problem. 

At peak Fed Funds Rate in 4Q07, average deposits per personal money market accounts were $55,000. After it went to zero, that number declined to its trough of $45,000 in 4Q08. Perhaps it was households burning through cash. But once rates went to zero and stayed there until 2017, personal money market average balances per account methodically climbed to $93,000. Why not keep it in an FDIC insured account with immediate availability if rates were minimal no matter the instrument of choice?

When rates shot up again in 2022, something different happened. At Covid's start in 1Q20, average balances per account was $94,000. Two years later, 1Q22, the average balance was $131,000. Zero rates. Government stimulus. Economic uncertainty.

Then inflation and the Fed's rapid response to try and curtail it in 2022 and 2023 by raising rates faster than at any time in recent memory. What happened to the average balances per personal money market accounts? They plummeted from its 1Q22 peak to a 3Q24 trough of $76,000 per account, a 42% decline. A similar thing happened in interest bearing retail checking accounts. Where did the money go?

The below chart shows that some flowed into CDs, as the proportion of CDs to total deposits shot up from around 15% to over 30% during the rates up period.

That would be the good news. Lower cost interest bearing checking and money market balances flowed to higher cost CDs. Still in our bank. But that isn't the whole story. Not by a long shot.

The above chart shows the Breckenridge ski lift rise of money market mutual fund assets, a clear alternative to bank accounts. Sofi Bank, a neo bank that has high yielding assets (mostly student loans) funded by high-cost deposits, grew from $155 million in deposits in 2022 when it acquired a small California bank to $47 billion in deposits today. Where did those deposits come from?

So my concern is less about where the stablecoin deposit headwind will take us, and more about where neo banks and alternatives to bank deposits will take us if we continue to manage our funding like we have done in the past. Because if we keep rates low during Fed tightening periods, people will seek alternatives, like they did in 2022-23. And they won't even call us to complain.

How will we change our funding strategy to mitigate this risk?

~ Jeff

Key Factor Why the USA Became the World's Super Economy? Banking.

The Bank of North America came into being during the darkest years of the American Revolution. By 1781, Congress was nearly bankrupt, the Continental currency had collapsed in value, and the government lacked a reliable way to finance military operations. Robert Morris, the newly appointed Superintendent of Finance, proposed creating a national bank to stabilize public finances and support the war effort.

Morris drew heavily on ideas previously suggested by Alexander Hamilton, who had advocated for a national bank as early as 1780. Congress approved the plan on May 26, 1781, granting a federal charter to the Bank of North America, which opened in Philadelphia on January 7, 1782.

The bank failed to succeed as the nation's first central bank for many reasons, among them was a weak central government, then formed under the Articles of Confederation, resistance to the monopoly power a central bank would wield, and Pennsylvania not recognizing federal authority to form a bank. It subsequently revoked its charter and re-formed it as a private bank.

But it was successful in financing the Independence War, facilitate tax collection and government payments, and improve confidence in the new nation's emerging finance system. Hamilton would go on to form Bank of New York (America's oldest surviving bank), and support a subsequent national bank operating under the Constitution, the First Bank of the United States.

In his efforts he was opposed by many luminaries such as Thomas Jefferson and James Madison, who felt such a bank with monopoly power will infringe on states' rights. 

Today, most historians view Hamilton as the father of American finance. While the First Bank's charter expired in 1811, the concepts he championed, including federal debt management, national credit, central banking functions, and a strong financial infrastructure, heavily influenced later institutions such as the Second Bank of the United States and eventually the Federal Reserve System established in 1913. 

From Hamilton's wisdom, we have the highly decentralized banking system of today. One that is becoming more centralized as a result of consolidation, and centralized regulation that is interfering in the localized distribution of capital so important to our nation's growth.

How did banking make the United States an economic powerhouse?

Economists often describe finance as the mechanism that moves savings from households to productive investments.

Research shows that well-developed financial systems help identify promising firms, monitor borrowers, spread risk, and fund innovation. When capital reaches the most productive users, economic growth accelerates.

The United States, unlike France, England and Germany that relied on powerful central banks and crony capital allocation, became exceptionally good at this process. What were some of its features?

1. It was unusually decentralized

For much of American history, the United States had thousands of independent banks rather than a few large national banks.

Unlike Britain, France, or Germany, banking developed through a highly federalized system where states often regulated banks separately. This created intense competition but also fragmentation. Economic historians argue that the structure of American banking reflected political choices that distributed financial power broadly rather than concentrating it in a handful of institutions.

2. It combined banks with exceptionally deep capital markets

One of the most distinctive features of the U.S. system was that firms could obtain financing from both:

• banks,
• bond markets,
• stock markets,
• venture investors,
• private equity investors.

Research shows that financial development promotes growth because it lowers the cost of external financing and allows firms with productive opportunities to obtain capital more easily.

American entrepreneurs were often able to raise money even when they lacked family wealth.

3. It evolved toward greater interstate integration

For much of the twentieth century, many states restricted branch banking. When those restrictions were gradually removed, banks became better at allocating capital across regions.

A peer-reviewed study found that states experienced faster growth in income and output after branch banking deregulation. Importantly, the improvement came primarily from better lending decisions, not simply more lending.

This finding is critical because it suggests that economic growth came from directing capital toward more productive businesses.

Did banking alone contribute to the US becoming an economic superpower? No. 

But we became who we are partly because our financial system became exceptionally effective at allocating capital to productive and innovative uses. Growth was driven less by the sheer quantity of lending and more by the financial system's ability to identify, fund, and monitor high-return investments. A system that requires a local decision maker to finance a Montana ranch, a nearby entrepreneur, or allow a local company to scale. 

Our banking system is remarkably close to Alexander Hamilton's original vision: a financial system that could mobilize savings, create credit, and direct capital toward national economic development.

It has allocated capital effectively during our 250-year existence. It's worth perpetuating.

~ Jeff

3 Critical Assumptions Missing From Your Financial Institution's Strategic Plan

As your institution kicks off its strategic planning cycle, navigating the noise of a turbulent geopolitical environment requires shifting away from outdated playbooks. Anchor your vision in reality. Uncertain environments demand more than reactive adjustments. They require a pro-active, stress-tested roadmap that transforms macro-economic headwinds into a competitive advantage. 

Allow this video to give you some thought provoking headwinds that can change your thinking, adjust your strategy, and create a financial institution built to last.

Reach out to me so we can collaborate on translating these insights int action tailored specifically to your institution's unique history, culture, markets, and direction. 

Email: jeffrey.marsico@wolfandco.com

Guest Post:Financial Markets and Economic Update For Second Quarter 2Q26

I start my newsletter on a sad note this quarter.  On June 22^nd, former Federal Reserve Chairman, Alan Greenspan, died at the age of 100.  He served as Fed Chairman from August, 1987 until his term expired at the end of January, 2006.  He was Fed Chairman during my formative years at Meridian Bank in Reading.  He guided us through the crash of 1987, the S&L crisis of the 1980s and early 1990s, the CRE crisis of 1990, the tech stock bubble of 2000-2001, September 11^th and subsequent recession, and left his position before the housing crisis grew into the Great Recession of 2008.  I’m still mad at him for raising interest rates so much in 1994.  On the positive side, he guided us to ten consecutive years of GDP growth from 1991 to 2001.  I, like most investors and banking industry professionals, had a love-hate relationship with him.  But to many of us, he will always be the Maestro.

Iran

The Iran conflict (or is it a war?) dominated the headlines and caused turmoil in markets- stocks, bonds, crypto, and commodities- during the 2Q26.  WTI crude prices peaked at $111.50 per barrel in early April, but right before the conflict began at the end of February, crude was at $68; the increase was +64%.  WTI crude is now back down to $70 today.  Gas prices spiked from just below $3.00 per gallon to $4.56 on May 21^st, and have fallen back to $3.88 today, for a much slower pace of decline.  Price increases likely would have been much worse had the US not had such high oil capacity.  Earlier episodes of oil price spikes in 1974, 1979, 1991, and 2022 were longer lived and quickly changed from inflation risk to recession risk. 

The primary issue is the danger to shipping in the Strait of Hormuz as Iran fired upon and threatened ships there.  The US set up a blockade so that Iranian oil could not leave the country, pressuring their economy.  While the US does not face oil and gas shortages, many countries do.  Europe imports 95% of its oil, China 75%, and Japan 99%.

The US is trying to negotiate with Iran and has a fragile 60-day ceasefire, but can we trust this global threat?  They use short- and long-range ballistic missiles and drones to threaten their region and the world.  They threaten ships in the Strait, support terrorists like Hezbollah and Hamas, continue to seek nuclear weapons, and kill thousands of their own people as they did earlier this year.  Can we even trust them to not build a nuclear weapon?  I think not.  Stock markets don’t trust them either, judging from recent volatility.

Change Has Come to the Fed- Finally

Kevin Warsh was sworn in as new Federal Reserve Chairman on May 22^nd at the White House (as Greenspan had been in 1987) and a new era began.  Warsh served on the Fed’s Board of Governors previously, from February, 2006 to March, 2011.  Like Greenspan, he believes productivity should be a major factor in monetary policy decisions and that the Fed should not just rely on published data and rules of thumb like the Phillips curve.  Artificial Intelligence right now is expected to lead to another productivity boom, just as the personal computer and the Internet did in the 1990s.  It was no surprise that there was no change in rates at Warsh’s first meeting while he contemplates what to change at the Fed.

Jerome Powell’s term as Chairman expired in May but, like company that doesn’t know when to leave a party, he insisted on staying on the Board of Governors.  It is a highly unusual move and last occurred in 1948, when Fed Chairman, Marriner Eccles, refused to leave the Board when his chairmanship ended despite a request by President Truman to step down.  Why do we give separate Chair and Board terms to these obnoxious people?  On May 31^st, Powell received the Profiles in Courage award from the JFK Presidential Library.  For what exactly?

Chairman Warsh is setting up five working groups to review monetary policy and operations, how to communicate to markets and to the public, data sources and potential new ones, productivity and job growth, and inflation measures and targets.  Hopefully he dumps the SEP, or Summary of Economic Projections, because it is often ridiculous, senseless, and more inaccurate than accurate.  (For this quarter, Warsh did not provide any projections; the other 18 FOMC members did).  Does it bother anyone that they project inflation to fall but it always takes two years to get to target?  Does it bother anyone that they project low GDP growth, but don’t project lower rates?

Some of My Favorite Economic Indicators

Leading Economic Indicators (LEI)- Could we be seeing the bottoming and reversal of the nearly four-year negative cycle in the LEI?  May’s index was +.1%, following April’s rise of +.3%.  March was down -.6% likely due to the shock of the Iran conflict, and February rose +.3%.  The index had declined in 39 of the last 47 months.  We’ve seen three increases- all this year and five months of no change in 2024 to 2026.  LEI had signaled recession many times in those 39 months, but like the inverted yield curves of 2022 to 2024, a sustained downturn in GDP never occurred. 

Inflation- The Iran conflict led to a spike in oil prices from $68 to $111.50 in April and we have seen prices fall back in May and June when hopes of an end to the conflict are at their highest.  However, headline and core (ex. food and energy) prices that were trending down toward targets are now uncomfortably high.  CPI for May y-o-y was +4.2% and core was +2.9%.  PCE in May was +4.1% and core was +3.4%.  PPI for May was +6.5% and core was +4.9%.  It feels like 2022-2023 all over again, but the measures are all expected to decline as oil prices and the slower moving gas prices drop back down to pre-conflict levels.  We are still in the unnatural and unprecedented situation where PCE is too close to or greater than CPI;  May PCE of +4.1% is just .1% under CPI of +4.2%.  May core PCE of +3.4% is .50% greater than May core CPI of +2.9%.  CPI is supposed to be .50% higher than PCE in a normal relationship.  I’m currently reviewing the “Truflation” measure, which is a real-time y-o-y estimate for CPI, started in December, 2021.  For you Bloomberg users, the ticker is TRUFUS44.

Real GDP- The Atlanta Fed’s GDP Now is currently at +2.5% for 2Q26.  GDP had improved in 1Q26 to +2.1%, following +.5% in 4Q25.  Nominal GDP was +5.1% in 1Q26, falling from +5.8% in 4Q25. 

Moody’s Beige Book Index- The June, 2026 Beige Book showed a lot of improvement.  Ten districts increased, one was flat, and one declined, which sadly was our own Philadelphia district.  The Moody’s index improved to 36.1 in June, following 25.0 in April, and 16.7 in March.

M2 Money Supply- M2 y-o-y growth was unexpectedly stronger in May at +5.6%, following April +4.7%, March +4.3%, and February +4.3%.  Finally, May’s growth is close to the average nominal GDP growth of +5.5% for 1Q26 and 4Q25.  We saw outright declines from December, 2022 to March, 2024 that were hurtful to growth.  The velocity of money has been flat at 1.41 in 1Q26, 4Q25, and 3Q25.  (Remember GDP=M x V).

Spacex and the Markets

Spacex completed the largest IPO in history on June 12^th, priced at $135 per share.  Trading opened at $152.75, hit a trading high of $225 within days, and slowly faded back to $153 on June 26^th.  Elon Musk became the first trillionaire with that issuance. The market cap stands at $2.0 trillion.

Spacex isn’t the only stock to rise and then fall back this quarter.  After stocks fell in March and April, prices rallied in May into June, before turning down as we see volatility with Iran and quarter-end repositioning.  The S&P 500 forward PE ratio is about 23 (19 to 24 is typical in a bull market).  AI investment and buildout will take an estimated three to five years and should lead to increased productivity, increased corporate profits, and increased GDP growth, albeit with potential increased job losses.  With the pool of available workers growing steadily and now at 14,063,000, this could spell bad news for the labor market.  Inflation will likely decline in this scenario.  (Warsh knows).

Don’t forget bonds.  They’ve been very volatile with a tendency toward rising rates most of the quarter.  During 2Q26, the 2-year Treasury yield rose 30 basis points to 4.09%, the 5-year Treasury rose 20 basis points to 4.13%, and the 10-year Treasury rose 5 basis points to 4.37% (after peaking at 4.50% with worries about the budget deficit, US debt/GDP at 122.8%, and uncertainty over term premiums).  Mortgage rates remain stubbornly high.  Watch out. The curve is flattening.

World Cup

Soccer fans have taken the US by storm, with an estimated 1 million to 5 million fans visiting the US, Canada, and Mexico for the matches.  Among the favorites are USA with Pulisic, France with MBappe (my personal favorite), Argentina with Messi (the greatest), England with Kane, and Norway with Haaland.  My niece got to go to the Ghana match in Philadelphia yesterday to cheer on her home country.  It has been exciting to watch some of the matches, but the 0-0 ties are a little trying.  It’s truly exciting as foreign visitors are praising the great time they are having in America. 

Large Hadron Collider

CERN has scheduled another long shutdown (LS3) for the LHC starting tomorrow to increase its capacity; this shutdown will last until June, 2030.  Other shutdowns included the September, 2008 one right after the LHC was started up on September 10, 2008, due to electrical issues and helium leaks and coincided with the Great Recession.  A temporary shutdown occurred in November, 2009 when a bird dropped a baguette into the electrical substation.  LS1 was from February, 2013 for two years, and LS2 was from December, 2018 for over three years, coinciding with the covid-19 pandemic.  We will wait for what’s next.  In all these years, I only remember one important discovery, that of the Higgs Boson particle in 2012.  Perhaps they don’t tell us everything.  Why would they keep spending extreme amount of money on the LHC?  Maybe they will someday tell us. 

Italy- Here We Come!!

This summer, we will visit Milan, Lake Como, Florence, Pisa, Tuscany towns of Chianti and San Gimignano, Cinque Terre, and Rome.  We are just praying that the 100+ degree heat wave ends before we go.  We have an excellent Italian travel agent who took care of all details- large and small.  I highly recommend her and if you plan a trip to Italia, let me know and I’ll give you contact information.

The Italian economy is producing just +.5% GDP growth despite its strength in manufacturing.  Unemployment is 5.7%.  Government debt is putting a drag on growth, with the debt/GDP ratio of 133.3%; US growth is also slowed by its ratio of 122.8%.  Prime Minister, Giorgia Meloni, has her hands full trying to improve the economy while navigating the EU rules. 

So, for now, arrivederci!

Thanks for reading!  As always, I appreciate your support!  Viva l’Italia!  DLJ 06/28/26

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.