Monday, November 16, 2020

Guest Post: Financial Markets & Economics Update by banker Dorothy Jaworski

I intentionally waited until after Election Day to write this update, not knowing it would become Election Week.  I was hoping that the politics would have died down, but that was not to be.  The markets are taking it all in stride, rallying strongly for most of this week and they seem more grateful for the prospect of a divided Congress, i.e, gridlock, where the Senate is retained by Republicans to counterbalance the Democratic House than by the outcome of the Presidential election outcome.  The markets believe the chance of tax hikes, repeals of tax cuts, and gigantic initiatives are greatly diminished. 

Stock prices are rising strongly, but bond prices have fallen from their highs.  A great GDP growth number for the third quarter of +33.1% last week and a large, 1% drop in the unemployment rate to 6.9% today have left fixed income investors thinking that the worst may be over for the economy.  But the ever present threat of COVID-19 lingers, with cases rising around the world.


The Ongoing Pandemic & The Economy

Strict lockdowns in our area were lifted in June, but there are still restrictions on many segments of the economy, such as bars, restaurants, the travel industry, entertainment, sporting events, and the like.  Many schools are conducting hybrid and virtual classes.  Life has gone on, but has not returned to normal.  Our behaviors have changed with fear of the virus.  Did you manage a vacation over the summer?  Many people would say, no, they did not want to travel. 

Jamie Dimon, CEO of JP Morgan Chase, said recently that we need to reopen the economy, safely of course, and especially in New York City.  Stop the economic devastation from the lockdowns.  He encourages leaders to let businesses reopen, so they can generate revenues and rehire employees.  He encourages those employees to go into the office, although he admits that some work-from-home will become a permanent change.  He also thinks kids should return to their classrooms at school.

There are lingering effects that are restraining economic growth.  Despite the improvement in the unemployment rate to 6.9% from its high of 14.7% in April at the height of the lockdowns, there still remain 10 million jobs lost since the pandemic began.  That leaves many on unemployment compensation, unable to pay rent or mortgages.  Small businesses are behind in rent and building owners have sought deferrals of their payments to lenders.  If people can get their jobs back, they can possibly refinance their mortgages in this exceptionally low rate environment.  Moody’s estimates that there is $70 billion in back rent across the nation.  Think for a minute about how huge that number is.

GDP surged by +33.1% (annualized) in the third quarter, after devastating declines of -31.4% in the second quarter and -5.0% in the first quarter.  Our economy remains about 3.5% lower than its peak in the fourth quarter of 2019.  The Federal Reserve estimates that fourth quarter growth will be +6.0%, so we may get back.  By the way, our economy has done better than all other nations; for example, Europe is 4.3% under their fourth quarter peak.  Even if we “get back” to earlier GDP dollar levels, it will have been an uneven recovery, with many individuals and businesses still struggling without adequate revenues.  The Federal Reserve has pledged to keep interest rates low until we reach full employment, which I estimate at 4.0%, and inflation averages above its target of 2.0%.

This is very significant, in that Fed Chairman Powell finally threw out the Phillips curve.  The Fed seemingly relied on this curve in that every time unemployment got low, they screamed inflation!  So now they are prioritizing full employment and will switch to “AIT,” or average inflation targeting, allowing the inflation rate to exceed their target for a period of time, rather than raising rates as they did from 2015 to 2018 chasing inflation that never materialized. 


Bucks & Montgomery

Unemployment rates soared after the lockdowns began in March, 2020.  Our area did not escape the devastation.  The national unemployment rate peaked at 14.7% in April and has steadily declined to 7.9% in September and 6.9% in October.  For a time, from April to August, our counties were trending 2% to 3% higher than the national average, which was worrisome.  Thankfully, this has corrected at least into September, when the national average was 7.9%, Bucks was 7.1%, and Montgomery was 6.6%.

The housing market is robust across the nation.  Prices on a year-over-year basis are accelerating, especially as people are migrating from cities to suburbs and state to state and are trading up to newer or larger homes as the pandemic progresses and they spend more time at home.  The latest national CoreLogic home price index for September, 2020 was +6.7% year-over-year.  Bucks and Montgomery counties are close to that for September, according to Zillow, at +6.4% and +5.5% year-over-year, respectively.  Projections for 2021 are at about +7.0% for all, driven by new trends in migration, smaller than normal housing inventories, and extremely low mortgage rates.

Our regional economy, covered by the Philadelphia Federal Reserve’s Third District, is doing well into the fourth quarter.  Their published indices, the Philly Fed and Philly Fed Non-Manufacturing, both rose in October, to 32.3 and 25.3, respectively.  Backlogs for both are lagging and weak, at 8.3 for the regular index and only 4.0 for the non-manufacturing one.  Not surprisingly, the quick recovery could give way to slower growth as we move forward.


The Outlook

Federal Reserve Chairman Jerome Powell put it best:  The outlook for the economy is “extraordinarily uncertain.”  When the election is finally behind us, we can work on the things voters said were their priority- the economy, the pandemic, and health care.  A stimulus bill from Congress to aid individuals, small businesses, and devastated industries such as airlines, which have been completely crippled by COVID-19, seems a strong possibility before year-end.  That may have factored in to the Fed’s projection of +6.0% GDP in the fourth quarter, followed by +4.0% in 2021.  Much hinges on the pandemic, therapeutics, and vaccines.

We will have low interest rates for at least three years, as promised by the Federal Reserve.  Many economists think that rates will stay near zero for the next five to seven years.  Remember, it took the Fed seven years to raise rates from the zero bound after the Great Recession of 2008.  When they finally tightened in December, 2015, core inflation was at +1.5% and unemployment was at 5.0%.  Thankfully, the Fed pushed the final Phillips curvers out!

COVID-19 is our number one uncertainty.  Are vaccines on the way soon?  Four companies, including, Moderna, J&J, AstraZeneca, and Pfizer- have their vaccine in late stage clinical trials, and most are taking risk to produce vaccines in case they are successful and approved to save time in getting them to the people.

Now, I will continue my rant about huge amounts of debt being added by the US Government.  Year-to-date, there was $4 trillion of new debt issued, bringing the outstanding total to $27.2 trillion, or 127.6% of GDP.   Economic growth has been proven to slow when debt-to-GDP exceeds 90%.  It is no coincidence that growth was in the low 2% range since 2009, when debt was sustained at over 90%.  The one benefit of that time period was that it was the longest, although lowest growing, economic recovery since World War II at 127 months.  If we managed to have growth of 2% during that time, I think once the “lockdown” rebound is over, and we resume “normal” growth, I think GDP will be less than 2%, due to the continuing increase in the debt-to-GDP ratio.  That may be our new “normal.”

Finally we are all weary and tired of lockdowns, capacity limits, and travel bans.  I keep thinking of one of my favorite quotes by Ernest Hemingway:  “There are only two places in the world that you can live happy.  At home and in Paris.”  One can only dream!


Large Hadron Collider Update

For those of you who have known me and read my quarterly updates for years, you may remember my favorite machine, the Large Hadron Collider, the 17-mile long circular tunnel built deep under the mountains in Switzerland, where all kinds of physics experiments and smashing of atoms take place.

The Collider, which is now over 12 years old, was down for maintenance for the past several years, but news about its activity has started again.  Previously, researchers in 2012 discovered its most famous particle, the Higgs Boson, which is a key building block of the universe.  In October of this year, they observed the decay of these particles for the first time.  They are now looking for mini black holes, and possibly parallel universes.  Recently, scientists created matter from high speed light.  And they are looking to take the power in the Collider up to 9.5 TeVs, or Tera-electron volts.  Each TeV is one trillion electron volts.  It’s crazy how scientists can work with atomic particles.  Stay tuned!


Thanks for reading!  

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 has been with Penn Community Bank and its predecessor since November, 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.

Friday, November 06, 2020

Create Operating Discipline at Your Bank

Bankers have made great strides in developing the strategies to succeed over the long-term, analyzing the customers that most value their strategic direction, and gaining the buy-in from their Boards of Directors and employees. The next challenge is to build the environment and culture where the organization moves toward its aspirational future. To create operational discipline that greases the gears toward the bank you want to be without continuous leadership intervention.

In the video blog I give one specific example of how to do that. Make your own choices on the operational discipline you need to move you closer to your aspiration.

Link in case the video doesn't appear on your device:


~ Jeff

Saturday, October 31, 2020

For Banks, Self Assessments Are Hard

Self assessments are hard, period. Not just in banks. But since this is a banking blog, let's focus there.

Strategic plans should include a fact-based self assessment. Some call it a situation analysis, others an environmental scan. They usually include a SWOT, which some people dislike but I find the vitriol around a SWOT to be mostly related to them not being honest or laundry lists of things the management team plan on doing nothing about.

Strength: The Management Team. Which for some might be true. Is it supported by low turnover rates of top performing employees, deeper relationships with customers, superior financial performance?

I recognize that everything can't have a SMART goal (specific, measurable, aggressive yet achievable, relevant, and time-based). But if you are going to say your "culture" is a strength, I'm going to ask why, and what does that get you.

So should you. 

Culture is something that I recently focused on during a couple speeches (virtual, of course) on creating alignment between your culture and strategy. Because culture is the environment you create that promotes or inhibits execution. Do you have a culture of innovation, empowerment, and positive accountability?

Most financial institutions would like to have such a culture. Because that is the environment that can lead to rank-and-file employees that recognize a need, be it a product or service, among your most profitable customer cohorts, and makes a business case for it (innovation and empowerment). That environment can lead to a project team with diverse functional expertise that is tasked with implementation, and not in six to twelve months (positive accountability). 

In my talk about linking strategy and culture, I finished with the following "What Now":

1.  Adopt a clear strategy that maps where you are to where you want to be.

Imagine that.

2.  Articulate the culture you want, and perform an honest assessment of the one you have.

No hubris please.

3. Identify the initiatives you must take to align strategy, culture, and accountabilities.

Positive accountabilities whenever possible to maximize the performance of those under your charge. See my post on this here

If you build the culture you want, you will likely perform a fact-based self-assessment with the ability to capitalize on your bank's strengths and fix or avoid the weaknesses.

~ Jeff

Monday, October 05, 2020

A Whale of a Tale: Enloe State Bank

 "The bank's on fire!" So said the panicked cleaning person that ran across the parking lot from the bank to the adjacent restaurant. "Call 9-1-1!"

The bank in reference was Enloe State Bank, a $37 million in total assets, one-branch bank based in Cooper, Texas, population 1,969. The fire happened on May 11, 2019 and came from their board room

(see pictures). On fire were documents requested by the Texas Department of Banking (TDB). Which made them suspicious.

Ya think?!

As suspected, the fire was purposefully set so the TDB couldn't get their arms around what was apparently going on.

And what was going on in this tiny enclave 80 miles northeast of Dallas that has four heads of cattle for every one person? Fraud. For over a decade.

According to the Office of Inspector General (OIG) In-Depth Review (IDR) of the incident:

"Enloe State Bank failed because the President and the senior-level Vice President perpetrated fraud by originating and concealing a large number of fraudulent loans over many years. ESB's President was a dominant official with significant control over bank operations and limited oversight by the Board of Directors (Board). The bank President used her role as primary lender, with inadequately controlled systems access, to originate millions of dollars in fraudulent agricultural and other commercial loans. She hid them from the Board and regulators with assistance from unnamed co-conspirators."

When the TDB shut them down and the FDIC investigators came in, they had to occupy the church next door because of the smell from the fire. Then they started contacting customers who unknowingly had loans. Pat Ainsworth was one such customer on the hook for a loan, $127,000 worth to be precise. Well, not actually Pat. The borrower was her dead husband. Who apparently rose from the dead two years after his death to sign loan documents.  

Since 2009, bank president Anita Moody had been booking fraudulent loans to do things like buy herself a Jeep, pay off her daughter's loan, and deposit money into her boyfriend's business account. And, it should be noted, in ponzi scheme like format, booking loans to pay for other fake loans so they wouldn't go delinquent. Over 100 loans totaling over $11 million for over a decade. 

The OIG used the term "dominant official" 64 times in the IDR. According to the FDIC, a dominant official:

"A dominant official or policymaker is defined as an individual, family, or group of persons with close business dealings, or otherwise acting in concert, that appears to exert an influential level of control or policymaking authority, regardless of whether the individual or any other members of the family or group have an executive officer title or receive any compensation from the institution... [A] dominant official is often found in a "One Man Bank" wherein the institution's principal officer and shareholder dominates virtually all phases of the bank's policies and operations. However, a dominant official can be found at institutions of various sizes, structures, and without regard to organizational charts."

 The FDIC issued this guidance in June 2011. The first Report of Examination (ROE) mentioning the presence of a dominant official at Enloe was in 2018. Moody had worked at the bank her entire adult life, having started there in 1978 while still in high school. She became president in the mid 2000's, and owned a near 25% stake in the bank. She also controlled IT access, and various other duties customary in a small bank with eight employees. Certainly enough to be considered a dominant person.

But she had help. In August 2020 the bank's vice president, Jeannie Swaim also pleaded guilty to a bank fraud charge, admitting to creating fictitious loans to channel over $400,000 to her husband over a period of five years.

The OIG was critical of the TDB and the FDIC for how long it took them to uncover the relative level of loan fraud. In the examinations done by both regulators between 2013 and 2018 the bank received a composite CAMELS rating of either a "2" or a "1". They received the "close 'em down" CAMELS rating of "5" only after Moody went all pyromaniac in her board room. A blinking red light to say the least. 

For her actions, Moody agreed to pay back the over $11 million she stole, and to spend seven years in federal prison. Where she can be the "dominant official" in her cell.

 True story.

~ Jeff

For more reading on Enloe State Bank:


Fox News:

Fort Worth Star Telegram:

Dallas Morning News (2019):

Tuesday, September 22, 2020

Bankers: We Have Choices. Choose Wisely.

Earlier this month I recorded a webcast for the Pennsylvania Institutute of Certified Public Accountant's Financial Institution Conference.  Because it was pre-recorded, I had the unique opportunity to not only think about my opening and closing, but typing them out so I was clear about the message. Here is what I said.


Hello and welcome to what I hope is the most unique PICPA Financial Institution's Conference ever, and will remain the most unique ever. I come to you today, not shaking your hands, or being able to point out and joke with old friends in the audience. Instead I'm in my home office, where I'm fortunate to have my 31 year old daughter, her boyfriend and their son, my grandson, and their 100 pound German Shepherd. Also my college-aged daughter, taking online classes, and her cat. And of course my wife and little dog. There is also construction happening. So if there are interruptions or impromptu visitors, please bear with me.

With the very unique environment unfolding at my house, we have an equally if not more unique environment happening at your bank. The pandemic has changed our lives, and the lives of our employees and customers, more than anything that I've ever experienced. And I've been in a war. It's just different. I feel like we remain quarantined, and many of your colleagues and those listening to my voice right now are doing so from home. What changes are permanent, and what will revert back to the way it was? It mostly depends on us.

Today, my task is to discuss these things and what I perceive as the way forward to long-term success. In the midst of uncertainty there can be opportunity. Our job is to recognize it, and act on it. Hopefully, my brief time with you this morning will generate discussion at your bank.

[Presentation happens here.]


A few slides ago, I spoke of culture. One that moved us from being tactical, thinking no further than six months to a year out. Of being complacent, hoping that the rapid change in technology and customer preferences will pass or somehow slow down, and being a "safe-choice" employer was not the same as being an employer of choice. Being that safe choice means that employees are comfortable, have mediocre salaries, decent benefits, and job security. They may not have the empowerment, career paths, continuous development, and upward mobility that younger, and yes more fickle employees want. But what type of employee does that leave us with?

Complacent means sitting back and waiting until things settle down. Do we want them to settle back to the environment where 4%-5% of our fellow financial institutions are acquired each year because they have not invested in the people or technology to lead us forward, or continue to strive for greater economies of scale, however investment bankers define that term? Was that trajectory ideal for our constituencies: employees, customers, communities and shareholders.

Being tactical is no longer tenable in its current practice. If we continue to trade strategic investments that have short term payoffs versus ones that may take two to three years then are we implementing the changes demanded by our constituencies? Will we continue to over-invest in support functions that can be automated, while under investing in areas where increased sophistication are becoming table stakes; the technologies, marketing sophistication, and highly capable employees that will deliver our bank to customers on their terms.

We have choices. Choose wisely.

Thank you to the PICPA for inviting me back!

If you want to read a blog post I wrote for them leading up to the conference, click here.

~ Jeff

Note: If you would like the deck from this presentation, please e-mail me at

Friday, August 28, 2020

Texas Big: First Road Trip Since the Pandemic

It was bound to happen. After four months of lockdown, bankers are getting back to the office. They never stopped working, mind you. But work has been different to say the least. This month was our first opportunity to visit clients outside of driving distance since March!

The challenge: We are based in Pennsylvania and our governor still has a 14-day quarantine order for those traveling from Texas. So we condensed site work, and stayed the weekend! Here are some video highlights from the trip. Over 1,300 miles.

Special thanks to the eminently polite people of Texas, and our friends at FirstCapital Bank of Texas, N.A. for such a warm welcome.

Did you know someone planted Cadillacs in Amarillo?

In case your mobile device doesn't see the video to play, here is the YouTube link:

Monday, August 03, 2020

Bankers: Hunker or Pounce?

Unprecedented times. How many of our borrowers on forbearance can begin making payments? What provision do we make this quarter? How do we justify it? What will our constituencies think when we have to foreclose on borrowers?

For most of us, the onset of a recession means a time to assess the risk on our balance sheet, to tighten underwriting standards, and ramp up workout teams. It's what we did in 2008-10. And we were successful. We lived to fight another day.

But is it the right strategy for this pandemic recession?

I delivered this talk on a recent bank trade association webinar. And I'd like to share it with you.

At the end of 2019 everything seemed like sunshine and rainbows. Over a decade of economic expansion. Record earnings. Pristine asset quality. Capital aplenty. 

Then Covid-19.

Unlike 2008, banks were not the bane of our problems. In 2008, we were in the eye of the storm. Sure, community banks had little to do with liar loans or what was otherwise termed sub-prime. But many banks were, including the nation's largest. And "bank" is what's on our marquee. So community banks were grouped with the wrong-doers, even though the wrong-doers were a small percentage of our industry. They represented an outsized percentage of banking assets. So into the valley sank our collective reputations.

But today, we were not part of the problem. And through the Paycheck Protection Program, we actually became part of the solution. Community banks in particular. Banks with less than $10 billion in total assets accounted for 51% of PPP loans and 44% of PPP loan balances. We punched well above our weight. 

What's more, the very large banks that participated (Wells Fargo did not initially) largely ignored their small to mid-sized customers. When PPP opened, businesses flooded the gates. Like the Pamplona running of the bulls. Most of them banked with the very largest. And many of their calls to their "banker" went unanswered. So they called around to their community bank. Call-answered. Loan request-submitted. Approval-recieved. Funding-deposited. 

Steve Busby, CEO of Greenwich Associates, a financial services analytics firm, said this about PPP borrowers: "If business owners did not know what it meant to be a borrowing customer or have loyalty from their bank, they do now."

So, a win.

But now reality. The below chart shows S&P Global Market Intelligence estimates for the rise in bank non-performing assets.

And according to multiple bankers I spoke with today, the leaning is to wait it out. Feeling like Patrick Swayze described in Next of Kin.

But do we want to pass up on the opportunity to slay the gladiator (i.e. big bank) while they're down? Do we want to pass on the opportunity to operate with fewer, yet more capable (and therefore higher compensated) employees? Do we want to retrain our once branch-centric customers that were forced onto online and mobile platforms to be branch-centric again? All the while tending to our balance sheet?

Do we want to hunker?

This is our moment. What strategic initiatives will bust our 2020 budget? It's already busted! And our collective capital position is much stronger than 2008.

This is our moment to prove we can walk and chew gum at the same time.

This is our moment to invest in our employees to develop the human element, so critical in a "relationship".

This is our moment to invest where investing needs to be done, and pull the plug on inefficient uses of our capital.

This is our moment to prove that anything the big bank can do, we can do better.

Or, we could hunker, and wait it out. And let the moment pass.

Your choice.

~ Jeff