Tuesday, June 30, 2026

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.

Saturday, June 27, 2026

What Drives Bank Valuations?

I've been researching what is driving bank stock valuations. It has been a subject that has lived rent free in my head for years. What I would like to drive valuation: long-term EPS growth, financial performance and financial condition. There is correlating factors to these drivers. But I also can't ignore how much tangible book value per share (TBVPS) growth is also a key driver.

Banking is one of the only industries that anchor valuations so heavily to equity. Not just my opinion. A CEO just lamented about this. What makes it troublesome is that retail bank stock investors like a clean balance sheet, good profits, and a strong dividend. Pay a higher dividend and you stunt TBVPS growth. And since this is a valuation driver, you might be slowing share price appreciation.

You can see this play out with banks that have poor earnings. They trade at relatively high P/EPS multiples versus very profitable banks. It is common to see a very profitable bank trade at less than 10x P/ EPS while a terrible earner trading at 15x-20x. The poor earner might be trading at book, while the good earner at 1.25x book. Telling you all that you need to know about the peculiarities of bank stock valuation.

To do a deeper dive, I ran a lot of data. I downloaded the following data points for years 2021 - 2026Q1:

TBVPS Growth, EPS Growth, Leverage Ratio, NPAs/Assets, ROAA, ROAE, Net Interest Margin, Cost of Funds, Yield on Earning Assets, Efficiency Ratio, P/EPS, P/TBVPS

I asked Copilot to find correlations between the financial performance and financial condition factors and compare it to investment banks and consulting firms' observations on bank stock valuations. Here are the most salient findings with accompanying tables and charts.

Interesting that Copilot made no correlation to Cost of Funds, even though those publicly traded bank with the lowest cost of funds traded at the highest P/TBVPS, and second highest P/EPS (see table below). Low COF banks trading at higher multiples than higher Yield on Earning Assets banks has been consistent over the 20 years I have made the comparison.

Here is what Copilot had to say after consuming all of the data and referencing industry experts.

✅ A. ROE / ROTCE ↔ P/TBV (strongest positive correlation)

Conclusion:
👉 This is the #1 driver of bank valuation multiples

Banks with higher ROE consistently show higher TBV growth and would command higher P/TBV

Supporting evidence:

Price-to-book rises with expected ROE and capital strength [bis.org]
Bank analysts explicitly link P/TBV to ROE vs cost of equity [breakingin...street.com]

The dataset implication:

ROAE + EPS growth columns will show highest explanatory power for valuation dispersion

✅ B. ROA ↔ Multiples (very strong, often underappreciated)

Conclusion:
👉 ROA drives quality of earnings, and therefore valuation durability

Clean ROA → high NIM, low NPAs, strong efficiency
High ROA banks don’t rely on leverage → more sustainable

Observed pattern in your data:

Banks with:
- ROAA > ~1.2%
- Low NPAs
- Efficiency <55%

→ also show:

Strong EPS growth
Strong TBVPS compounding

Industry confirmation:

ROA reflects true operating performance and asset quality [linkedin.com]
Markets reward “clean ROE built on ROA,” not leverage-driven returns [linkedin.com]

✅ C. EPS Growth ↔ P/E (very strong)

Conclusion:
👉 Growth is the primary driver of P/E dispersion

From your dataset:

EPS growth volatility is very high across banks
High-growth names (especially >15–20%) stand out sharply

Relationship:

Higher forward EPS growth → higher justified P/E

Analyst view:

Bank valuation embeds expected earnings growth + cost of equity [breakingin...street.com]

✅ D. TBVPS Growth ↔ P/TBV (structural correlation)

Conclusion: 👉 TBV growth is the long-term anchor of returns

In the dataset:

TBVPS growth aligns tightly with:
- ROE
- retained earnings
- efficiency

Banks with steady TBV compounding:

Show stable ROE
Have better efficiency ratios

✅ E. Asset quality (NPAs) ↔ Multiples (negative correlation)

Conclusion: 👉 One of the strongest negative drivers

From the data:

NPAs vary dramatically
Higher NPAs → lower ROA → lower ROE → compressed multiples

Industry evidence:

Credit quality directly affects risk and valuation via expected losses [intrinsic-...vestor.com]

✅ F. Efficiency ratio ↔ Valuation (negative correlation)

Conclusion: 👉 Efficiency drives operating leverage and ROA

From the data:

Banks with efficiency <50–55% consistently show:
- higher ROA
- better EPS growth

Interpretation:

Markets reward cost discipline + operating leverage

✅ G. NIM ↔ ROA ↔ Multiples (moderate–strong chain)

Conclusion: 👉 NIM is an indirect but important driver

From your dataset:

Higher NIM → higher ROA → higher ROE → higher valuation

Industry context:

NIM compression in 2025 is already affecting profitability expectations [mckinsey.com]

✅ H. Leverage ↔ Multiples (non-linear / weak-to-negative)

High leverage can boost ROE
But:
- increases risk
- lowers valuation quality

The dataset:

Shows mixed relationship
Supports known reality: markets discount “leveraged ROE”

3) Synthesis: What actually explains bank multiples (ranked)

Tier 1 (dominant drivers)

ROE / ROTCE
EPS growth
TBVPS growth

Tier 2 (core operating drivers)

ROA (asset-level profitability)
Efficiency ratio
NIM

Tier 3 (risk modifiers)

Credit quality (NPAs)
Capital / leverage

4) How this aligns with recent investment-bank / industry commentary

🔹 1. Profitability (ROE) is still the anchor

Valuation gaps across banks persist largely due to ROE dispersion
Investors reward sustainable ROE above cost of equity [bis.org]

🔹 2. Growth skepticism is suppressing multiples

Despite strong 2024–2025 earnings:
- bank P/B and P/E remain structurally low
Investors are questioning long-term growth durability [mckinsey.com]

🔹 3. Markets increasingly distinguish “quality of earnings”

Banks are not valued just on ROE:
- but how ROE is generated
Clean ROA + low credit cost outperform leverage-driven models [linkedin.com]

🔹 4. Strategy + credibility now matter more

Bain: valuation dispersion driven by:
- execution consistency
- growth narrative
- capital allocation credibility [bain.com]

🔹 5. Structural valuation framework

Investment banks (FIG coverage) consistently anchor:

P/TBV ↔ ROE / ROTCE
P/E ↔ EPS growth + cyclicality
Adjusted for:
- credit risk
- capital strength [acetheround.com]

5) Bottom line (what the dataset is telling us)

🔴 The single most important takeaway:

👉 ROE (and ROTCE) is the strongest direct driver of bank trading multiples

🔵 But the true causal chain in your data is:

NIM + Efficiency + Credit quality → ROA → ROE → TBV growth → Multiples

🟢 And the market overlay is:

Growth (EPS, TBV) determines P/E vs P/TBV premium
Risk (NPAs, leverage) determines discount vs premium

Thursday, June 11, 2026

How Banks Make Money: Culture. Not Kidding.

I recently spoke at a banking conference with a session titled: Profit Drill Down-How Banks Make Money. Below is a summary of my comments.

Core Thesis

Banks improve performance when executive-level KPIs are systematically translated (“waterfalled”) down to every level of the organization—so that individual roles, units, products, and customers all align to the same economic drivers. When done well, this creates a self-reinforcing culture—an “invisible hand” guiding behavior without constant top-down pressure.

1. The Problem: Strategy Doesn’t Reach the Front Line

• Banks typically track high-level KPIs (e.g., Net Interest Margin, ROE, efficiency ratio).

• But these metrics often don’t translate meaningfully to frontline staff:

Example: What does a 3.80% NIM target actually mean to a relationship manager?

Without translation, KPIs remain abstract, disconnected, and ineffective as drivers of behavior.

2. Culture as the Missing Link

• The presentation defined culture as:

An“invisible operating system”
An alignment mechanism
A value creation engine

Strong performance isn’t just about strategy—it’s about embedding that strategy into everyday decisions.

3. The Solution: KPI Waterfalling

The key idea is to decompose bank-level financial outcomes into actionable drivers at every level:

Example Cascades

• Net Interest Margin (NIM) → Branch KPIs (deposit mix, deposit spreads (%), deposit spread growth); Lender KPIs (loan spreads (%), loan spread growth)

• Return on Equity (ROE) → Marketing KPIs (campaign ROEs); Lender KPIs (portfolio ROEs); Relationship KPIs (ROE hurdle rates)

• Efficiency Ratio / Expense Control → Support function KPIs (opex/loans serviced), opex/deposits serviced)

Result: Each employee sees how their actions directly affect enterprise outcomes.

4. Extending to Products and Customers

• The framework emphasizes profitability at the product and customer level, not just the bank level by understanding:

Which products generate the most risk-adjusted revenue
Which customers create or destroy value

Banks can allocate effort, pricing, and strategy more effectively.

5. Performance Insight: Variation Matters

• Benchmarking across banks shows wide dispersion between top- and bottom-quartile performers. Benchmarking within the bank can also be powerful, i.e. which Lender demonstrated the best improvement in loan spreads among our team of lenders?

• Trend compares apples-to-apples: how did the Market Street branch deposit spread improve over time?

This highlights:

o Execution—not just strategy—is what differentiates performance

o Proper alignment and accountability can close that gap

6. Cultural Impact: Turning KPIs into Behavior

When KPI waterfalling is done correctly:

• Everyone shares the same goals, not just executives

• Employees feel:

Connected to the strategy
Supported rather than policed

• Decision-making becomes:

Faster. There is greater empowerment, less policing
More consistent
Economically aligned

7. Key Takeaways

• Tie strategy → KPIs → compensation → daily activities across all levels

• Make KPIs relevant and actionable for each role

• Use alignment to create a performance-driven culture without constant oversight

• Culture becomes the“invisible hand” that drives sustained improvement

Bottom Line

The presentation argued that financial performance is not just a function of strategy—it’s a function of alignment.

When banks successfully cascade KPIs from the boardroom to the frontline and down to individual customer decisions, those KPIs stop being metrics and instead become shared goals that shape behavior, ultimately driving superior, consistent performance.

~ Jeff

If you find granular measurements like what was mentioned here as elusive or you lack the resources to do it, please contact me at jeffrey.marsico@wolfandco.com.

Wednesday, May 27, 2026

Lessons Learned From Selling Your Bank

I recently attended the 141st Texas Bankers Association annual convention in Dallas, and true to form, attended a few sessions that grabbed my attention. First was a panel with two bank CEOs that recently sold their bank to larger financial institutions. They were:

Dan Rollins: Former Chairman and CEO of Cadence Bank, who recently sold to Huntington Bancshares

Bob Franklin, CEO of Stellar Bancorp, who recently sold to Prosperity Bancshares

Overview

This overview synthesizes insights from the Texas Bankers Association breakout session, merger press releases, and S-4 filings for the Cadence–Huntington and Stellar–Prosperity transactions. The focus is on understanding why these banks chose to sell and the strategic considerations behind each decision.

Key Themes Across Both Transactions

1. Scale and Regulatory Pressure: Both transactions highlight the increasing regulatory burden associated with crossing asset thresholds. Cadence (~$50B) and Stellar (~$10B) each faced step-changes in compliance costs, making standalone strategies less attractive.

2. Need for Technology Investment: Management emphasized the growing cost and complexity of digital banking platforms. Larger institutions like Huntington had invested significantly more over longer periods, creating a competitive gap.

3. Search for Economies of Scale: Both institutions pursued growth to offset fixed costs (compliance, technology, Durbin amendment impacts). When organic or acquisition growth was insufficient, a sale became the optimal path. Interesting insight because Cadence completed two acquisitions in 2025. Were they running out of targets?

4. Strategic Fit over Price: Management commentary indicates price was not the primary driver; cultural fit, technology, and long-term competitiveness were more important.

Cadence Bank → Huntington: Reasons for Sale

• Strategic expansion and scale: The merger gave Huntington immediate scale in high-growth southern markets and created a top-10 bank footprint.

• Competitive positioning: The combined entity would operate across 21 states and major MSAs, allowing stronger competition against larger regional and national banks.

• Technology and capabilities gap: Cadence leadership acknowledged larger banks had more advanced platforms and investment capacity. Huntington wasn't investing in things that Cadence was not. It was just that Huntington started years before, and was investing 10x as much.

• Growth platform: The transaction created a platform for continued organic investment and expansion into fast-growing markets.

Stellar Bancorp → Prosperity: Reasons for Sale

• Sub-scale economics: At ~$10B, Stellar faced Durbin amendment pressure and step-change regulatory costs without sufficient scale.

• Failed M&A strategy: Stellar attempted to acquire another institution to reach ~$15B but was unsuccessful, leading to a sale decision.

• Need for scale in core markets: The merger created one of the largest Texas-based deposit franchises, improving operating leverage.

• Enhanced competitive position: The combined entity could better invest in growth, technology, and customer capabilities.

Lessons Learned (Panel + Filings)

• Threshold Management Matters: Banks near key regulatory asset thresholds must proactively plan their path (grow through or sell).

• Technology is a Major Driver: Increasing investment requirements make scale critical.

• Execution Risk of MOEs: Both executives noted challenges with mergers of equals, especially around culture and integration.

• Strategic Optionality is Key: Institutions must continuously evaluate both acquisition and sale opportunities.

• Retention and Integration Planning: Successful transactions require strong focus on employee retention and post-merger execution.

Conclusion

Both Cadence and Stellar ultimately sold not due to immediate need to do so, but because of structural industry pressures—scale, regulation, and technology investment requirements. Their decisions reflect a broader trend in regional banking consolidation where size increasingly determines perceived competitiveness.

It also points out, in my opinion, the difficulty in distinguishing one institution from another the larger you get. Does "community bank" resonate when you have nearly 400 branches in over 300 communities? Does your size and the law of large numbers force larger banks to play in larger loan and funding pools with more commoditized pricing?

Maybe the law of large numbers, that I wrote about over 10 years ago on these pages, also forces banks to be something they tried so hard not to be... commodities. If that is the case, then size would presumably be the only thing that matters.

~ Jeff

Note: My firm prides itself on performing periodic reviews of who banks can buy, and at what price, who they can sell to, and at what price, and the financial impacts of strategic partners of like-sized financial institutions. While nobody can be unbiased, we build process into our review so we are being partners with our clients and being responsive to what they want to do. Contact me at jeffrey.marsico@wolfandco.com of you would like us to do this for you.

Saturday, May 16, 2026

Memorial Day: 250 Years Later, Remember Captain Nathan Hale

The story of Captain Nathan Hale is one of the most enduring legends of the American Revolutionary War. Not because of the resounding success of his most famous mission. But because of his rare bravery. It is a tale of intense patriotism, a trusting miscalculation, and a final, defiant statement that echoes through American history.

Schoolmaster to Soldier

Hale was from Connecticut and was a brilliant young man. He graduated from Yale at 18 years old and became a schoolteacher known for his gentle demeanor and passion for teaching.

When the Revolutionary War broke out in 1775, his deep-rooted ideals of liberty compelled him to join up for the cause. He enlisted in the Connecticut militia, was quickly promoted to captain, and eventually joined the Continental Army regulars, 19th Regiment of Foot. By early 1776, his unit was stationed in New York, where George Washington's forces were attempting, quite unsuccessfully, to defend the city against superior British forces.

The Desperate Mission

By September, the American situation was dire. The British had severely defeated Washington's forces at the Battle of Long Island, forcing the Continentals to retreat to Manhattan. Washington desperately needed intelligence on the British forces regarding their numbers, fortifications, and next moves.

Spying was not considered noble at that time. Although I am thankful to Captain Hale that attitudes have since changed given my Navy rating. Asking for volunteers to slip behind enemy lines, Hale stepped forward fully aware that if caught, he would not be treated as a prisoner of war, but executed as a common criminal.

Despite the stigma and the extreme risk, Hale was steadfast. He reportedly told a fellow officer "I wish to be useful, and every kind of service, necessary to the public good, becomes honorable by being necessary." He didn't do it for being valorous, but it needed to be done.

Behind Enemy Lines

Hale disguised himself as a Dutch schoolmaster seeking work. He crossed Long Island Sound from Connecticut to Huntington, Long Island, which was under British control.

For about a week, Hale successfully gathered intelligence on fortifications and troop numbers, hiding his notes in his shoes and writing them in Latin. However, aside from this, he was an amateur, lacked formal training in tradecraft, and was unusually trusting.

The Capture

On September 21, 1776, as Hale was preparing to cross back over the Long Island Sound, his mission came to an abrupt end.

As recounted in loyalist diaries, the most widely accepted version of his capture was that Major Robert Rogers, a brilliant and ruthless British officer that led a Loyalist unit called the Rogers Rangers, suspected Hale a spy. He approached him in a tavern, pretending to be an American sympathizer. Hale let his guard down and revealed his mission.

The British found his sketches and notes in his shoes.

A Spy's Death

Because he was caught out of uniform and behind enemy lines, and given the prevailing attitudes on spying, Hale was denied a trial. The British commander, General William Howe, ordered him to be hanged. He was 21 years old.

On September 22, 1776, Hale was marched to the gallows in Manhattan. The exact location is debated, but it is believed to be near modern-day Grand Central Terminal.

According to eyewitness accounts from British officers who respected his composure while facing imminent death, Hale faced his fate with incredible dignity. Before the noose was placed around his neck. He was asked if he had final words. What he said next would resonate through the Continental Army as motivation to continue the fight, and through the annals of history.

"I only regret that I have but one life to lose for my country."

Nathan Hale's mission was a military failure- none of his gathered intelligence ever reached Washington or the Continental Army. However, his death became a massive psychological victory for the American cause. He transformed an executed spy into an enduring symbol of self-sacrifice and unwavering patriotism.

Today, he is recognized as the official hero of the State of Connecticut, and his statue stands outside the headquarters of the CIA.

On this Memorial Day and on our nation's 250th birthday, thanks to people like Nathan Hale, I ask that you remember Captain Hale and the 1%-2% of America's population at that time that gave their lives to establish our great nation.

~ Jeff

Prior Memorial Day Posts

Jeff For Banks: Memorial Day: Remember 1st Lt. John Fox

Jeff For Banks: Memorial Day Post: Honor Those Fallen During Our Afghanistan Withdrawal

Jeff For Banks: Memorial Day: Remember Sergeant (USMC) Rafael Peralta

Jeff For Banks: Memorial Day: Remember Captain Andy Haldane

Jeff For Banks: Memorial Day: Remember Maurice "Maury" Hukill

Jeff For Banks: Memorial Day: Remember Irv Earhart

Jeff For Banks: Memorial Day: Black Hawk Down

Sources:

https://www.continentalline.org/CL/article-060102/#:~:text=Captain%20John%20Montressor%2C%20a%20British,Sir%20William%20Howe%2C%20British%20commander.

https://www.loc.gov/loc/lcib/0307-8/hale.html#:~:text=The%20%22hard%20intelligence%22%20whose%20paucity,of%20a%20British%20officer%2C%20Lt.

https://bonniekgoodman.medium.com/otd-in-history-september-22-1776-nathan-hale-executed-for-spying-0e6bc3f46d13#:~:text=According%20to%20British%20officer%20Frederick,22%2C%201776).

Friday, April 24, 2026

Bank Earnings Season: What the Big Four Are Telling Us About the U.S. Economy

It's earnings release season and pundits are out in full force reading the tea leaves from banks in their coverage universe. I took a different approach.

I analyzed the earnings releases and the earnings calls of the U.S.'s top four banking companies: JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo. Together, they represent a hard-to-ignore $13.4 trillion of total assets.

I didn't do it to gauge these banks prospects. Instead, I did it to decipher their financial performance, condition, and their commentary on the U.S. economy and banking sector. Below is a summary of those four banks disclosures, aided by Copilot to help absorb a lot of information.

1. The U.S. Economy: Resilient, Not Reaccelerating

Unambiguous signal:
The U.S. economy in early 2026 is holding together better than feared, but it is not entering a new growth phase.

Across all four banks:

Consumers are still spending

Corporate balance sheets remain solid

Credit deterioration is limited and gradual

Confidence is cautious, not retreating

Yet no CEO described demand as accelerating. The language was consistent: “Resilient,” “stable,” “cautious,” “selective,” “uneven.”

It would be unusual for a financial institution to clamor about bubbles bursting or economic decline because that happens for multiple reasons, one of which is consumer and business confidence. Why buck the confidence game? The bankers' comments point to a late‑cycle soft‑landing environment rather than a boom or a slowdown cliff.

2. Where the U.S. Economy Is Strong

A. The U.S. Consumer (Top Half of Consumers Are Carrying the Load)

What banks see:

Debit and credit card spend volumes are still growing
Travel, leisure, and services spend remains firm
Wealth clients are active
Credit card losses are higher than cycle lows, but below stress thresholds

Important nuance from calls:

Wells Fargo and JPM both emphasized bifurcation
Upper‑income households and asset owners are fine
Lower‑income consumers are under pressure—but not yet cracked

Translation:
Aggregate data looks healthy because the top half of consumers is offsetting softness below. That’s sustainable for a while—but not indefinitely. The highly leveraged are vulnerable.

B. Corporate America: Balance‑Sheet Strength > Confidence

Across all four banks:

Investment‑grade borrowers dominate new lending
Revolver utilization remains below historical norms
Cash balances are solid
Debt issuance is active, especially in investment grade and term markets

What’s missing:

No surge in utilization
No capex boom
No hiring acceleration

Translation:
Firms are financially strong but waiting, not expanding aggressively. Volatile and changing government policies and priorities are keeping us in a hovering mode.

C. Financial System Health

This may be the strongest message of all.

CET1 ratios are strong across the board
Liquidity is abundant
Funding is stable
No signs of liquidity strain
Nonbank exposures (NBFI, private credit, fund financing) are actively monitored and structurally conservative. The fact they had to emphasize this makes me think there is something to the weakness in this lending.

Translation:
Whatever macro risks lie ahead, the U.S. banking system is well positioned to absorb them. At least much more so than 2008.

3. Where the U.S. Economy Is Weak or Vulnerable

A. Growth Is Narrow, Not Broad

Growth is currently relying on:

Consumer spending
Financial services activity
Capital markets normalization

It is not relying on:

Manufacturing boom
Wage acceleration
Productivity surge
Broad business investment

This makes the expansion slow and fragile, even if not imminently unstable.

B. Lower‑Income Consumer Stress Is Real (But Contained—for Now)

Multiple banks independently referenced:

Higher sensitivity to fuel and commodity prices
Thinner household and business financial buffers
More price elasticity in discretionary categories

Credit data has not yet turned sharply—but early warning signals are visible.

Translation:

This is not a recession signal—but it is a reminder that the consumer story rests on a narrower base than headline numbers imply. Bubbles bursting might be a recessionary signal, but air is slowly seeping from would-be bubbles, as it has in the commercial real estate and multi-family markets.

C. Rates Are a Double‑Edged Sword

Banks are no longer getting easy net-interest income lift from falling rates
Asset‑sensitive banks (WFC, BAC) are facing NIM compression
Rate cuts would help borrowers—but hurt bank earnings power particularly in under-valuing deposits
Higher‑for‑longer stabilizes income but pressures marginal borrowers

Translation:

Monetary policy is now distributional, not uniformly stimulative or restrictive. The 2Y Treasury is 3.83%, 10Y is 4.34%. Fed Funds, an overnight rate, sits between the 1Y and 2Y.

What the Four Banks Say About the U.S. Banking Sector

4. Sector Diagnosis: Strong, Profitable, but Entering a New Phase

The earnings collectively show the banking sector has moved from:

Post‑crisis repair → Post‑pandemic stabilization → Post‑rate‑hike normalization

We are now in a phase where:

Earnings are solid
Credit is manageable
Capital is abundant
Growth depends on execution, balance sheet and revenue mix, and discipline

This is not a leverage‑driven cycle. Which speaks to the ability of balance sheets to withstand recession.

5. Strengths of the U.S. Banking Sector

A. Capital & Liquidity Are Not the Constraint

Every bank emphasized:

Excess capital
Share buybacks
Ability to support clients in stress-although the temptation to abandon stressed clients is there
Regulatory clarity improving (Basel, G‑SIB)

This is the opposite of 2008 or 2020.

B. Credit Underwriting Is Conservative

Evidence across banks:

High share of investment‑grade exposure
Structural protections in NBFI lending
Sub‑60% advance rates in private credit
Limited CRE office exposure relative to system capital

The industry has learned—perhaps overly learned—the lessons of the last cycle.

C. Fee Businesses Are Doing the Heavy Lifting

An underappreciated macro point:

Payments, treasury services, asset management, and markets are now core earnings engines
This reduces dependence on rates
It stabilizes earnings across cycles

Citigroup’s Services and JPMorgan’s payments ecosystem are emblematic here. Community financial institutions can learn something here, stop talking about it, and start making the investments necessary for fee businesses to be a larger contributor to revenues and profitability.

6. Weaknesses and Structural Challenges

A. Earnings Are More Sensitive to Confidence Than Credit

Paradoxically, the biggest risk is not defaults—it’s activity.

Banks need:

Deal flow
Markets activity
Client engagement
Balance‑sheet utilization

A confidence shock—even without a deep recession—would hit earnings faster than credit losses because bank balance sheets are positioned for moderate credit shocks.

B. Margin Compression Is Structural

Net interest margins are no longer expanding easily.

Deposit betas are higher. As pricing becomes more transparent and money movement easier, this is unlikely to change.
Asset mix is shifting to lower‑yielding products
Competition is rational but real

This pushes banks toward:

Cost discipline
Fee growth
Balance‑sheet optimization

C. The Cycle Is Now About Sorting, Not Survival

The era when “banks move together” is over.

Strong franchises gain share
Execution matters more than a unique strategy
Management and markets remain key ingredients

Bottom‑Line Interpretation

What the Big Four Are Telling Us—Taken Together

About the U.S. economy:

It is resilient but not robust
Slow growth is holding, not accelerating
Risks are asymmetric but manageable
A soft landing remains the base case

About the banking sector:

It is healthy, liquid, and profitable
Credit risk is contained
Capital is a strategic asset again
The next phase rewards discipline, not leverage

~ Jeff

Wednesday, April 01, 2026

The Scale Imperative: Banks Can Acquire Credit Unions

The traditional financial industry is facing a quiet, steady drain of its lifeblood. While the "unbanked" population is shrinking, the "loyalty" of the modern consumer is fragmenting. Millennials and Gen Z—the oldest of whom are now 45—are systematically moving their balances away from traditional institutions toward "cool" digital tools and high-yield platforms like Rocket or SoFi. Even loyal Gen X customers are increasingly treating their primary bank accounts as "paycheck motels", a term coined by Ron Shevlin, quickly routing funds to wherever they earn the most.

To survive this shift, banks don't just need better apps; they need scale.

The Untapped Reservoir of Retail Funding

Many banks have pivoted toward business banking to find higher balances and margins, but the foundation of a community bank’s funding remains retail deposits. Interestingly, the most robust retail deposit bases are currently locked inside credit unions—institutions that are struggling with their own scale issues and merging at a similar clip to banks.

While credit unions buying banks have dominated the headlines and trade group lobbying, it is time for the industry to flip the script. Banks can—and should—buy credit unions.

Industry Interest

I recently sat on an ABA panel at the recent ABA Washington Summit about this very issue. Joining me were industry experts on such transactions from law firm Luse Gorman and the ABA, moderated by Dave Daraio of Maspeth Federal Savings and Loan Association in Queens. The message: let’s pivot from lobbying against CU-bank deals to executing our own. It can be done.

Debunking the Myths of the "Impossible" Deal

The industry has long viewed bank-on-CU acquisitions as a regulatory and accounting nightmare. And recent history is no help. But the landscape has shifted:

The Legal Path Exists: Federal law (12 U.S.C. §1785) and NCUA regulations (12 CFR Part 708a, Subpart C) explicitly provide the roadmap for a bank to acquire the net assets of a credit union.
Regulatory Winds are Changing: The NCUA is currently rewriting its rules to make charter conversions to mutual banks easier, and is potentially "defanging" the poison pills of the past that they have wielded to thwart bank-CU deals.
The Efficiency Edge: Despite their tax-exempt status, credit unions are often less efficient than banks. For similarly sized institutions, banks have historically delivered better financial performance, even after paying taxes.

Overcoming the Capital Hurdle

The primary challenge is accounting. These deals are structured as asset purchases where the credit union’s value must be distributed to its members. While this can strain a buyer’s capital, it creates a unique opportunity for:

Stock Banks: Their ability to raise fresh capital gives them an advantage in absorbing these assets.
Larger Banks Buying Smaller CUs: When a larger bank acquires a smaller credit union, the capital contingencies become negligible, making the deal "cleaner" and faster to execute.
Member-to-Mutual Deals: The NCUA would likely be friendlier toward deals where credit union members gain depositor rights in a mutual bank.

Call to Action: Who Will Step Up?

We are currently in a favorable regulatory environment for deal-making. And I will confess that my firm would welcome the opportunity to be at the forefront of this deal-making. More important to readers, we cannot continue to ignore the fact that our retail funding base needs a massive infusion of scale to compete with non-traditional providers while doing so profitably.

Credit unions have the deposits banks need, and many are looking for an exit due to scale or succession issues or a way to provide more flexibility to their members.

The tools are in the manual. The law is on the books. The market demand is clear.

It is time for bank leadership to stop complaining about credit union expansion and start executing their own. Who is going to step up and lead the first major "reverse" merger of this new era?

~ Jeff