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

Sunday, July 19, 2020

Bankers: Who Has These Three Drivers of Value?

Two years ago bank stock analysts from investment banking firm Boenning & Scattergood identified three attributes in a financial institution that investors should look for. I wrote a blog post on it that is currently my third most read post of all time.

The three attributes were:

1. Superior Growth Prospects

2. Excess Capital

3. Strong Deposit Franchises

I can get behind these three. Can you?

Who Has "It"?

In 2018, I searched for individual financial institutions that met each of these criteria. In this post, I would like to search all publicly traded financial institutions between $1 billion and $10 billion in total assets to ensure I get adequate trading volumes to be able to compare trading multiples of banks that qualify as having these attributes and their financial performance. This resulted in 292 financial institutions (the "Measured Banks").

From there, I defined superior growth prospects as top quartile asset growth over a three year period. I defined excess capital as top quartile tangible equity to assets for the most recent year ended 2019. Strong deposit franchise was defined as top quartile non-interest bearing deposits to total deposits for that same period. 

The following table identifies all of the financial institutions that met at least two of the three criteria.

Thursday, June 25, 2020

Three Ways to Align Marketing With Profitability

The inability to connect Marketing activities to the bottom line is what I frequently hear from bankers that think the Marketing Department is a cost center. Measurement is difficult. 

I also hear that silos are a problem in banking. Yet Marketing is frequently held to account for the ROI of the checking or home equity campaign. And branch bankers say they weren't consulted nor were they included in promotion planning. They often hear of the campaign on the radio while driving home. 

If you read my articles, watch my videos, or have heard me speak you know I'm a big proponent of the Marketing function taking a more prominent role in banks because customer acquisition and the customer experience has changed so much in the past decade. There must be an integrated, cross functional approach to acquiring, onboarding, and serving customers well to deepen relationships and turn them into champions of your brand. And that includes support functions. Nothing is more frustrating than turning a raving fan customer into a cynic because they get buzz sawed by the wire transfer person at HQ.

I have a bias towards profitability and against widgets. I remember doing a process review at a bank where one branch had hundreds of checking accounts with $100 or less. When I asked... you know the answer, right? A CD promotion that required opening a checking account. Widget counting. If the branch manager was accountable for consistently improving the profitability of her branch, and the Marketer was responsible for the continuous profit improvement of retail checking, this wouldn't have happened. Because having hundreds of low balance retail checking accounts attracts cost, with little revenue. But I bet you the CD promotion report had none of this.

So here is what I suggest:

1. Make profitability the ultimate accountability. 

Mandatory disclosure, my firm measures line of business, product, and feeds to customer profitability systems. And I work diligently with banks to analyze, adjust, and improve their profit trends using this information. Because I believe it is the way to go. Imagine if Marketing were responsible for the continuous improvement of the home equity line of credit product (see table).

The pushback from using profit and profit trend as the ultimate accountability, and not just from Marketing mind you, is that there are so many things outside the control of the marketer. True. But isn't that the case for any line of business with their profit and loss responsibilities? I have no control over the D&O insurance premium at my firm. But I'm sure as heck responsible for the firm's profitability. Which leads me to my second way to hold Marketing accountable.

2.  Implement Product Management. 

Which is totally related to (1) above. If Marketing was accountable for managing the HELOC product, wouldn't they engage in cross-functional collaboration to improve the profit picture? For example, in examining the above table, it is clear that the Bank has done a good job at increasing the product's spread. Fee income has been flat. And operating expense as a percent of the portfolio has been rising, even as the portfolio has been growing. Aha! What is afoot? Is credit underwriting manual? Do customers apply online and the loan moves seamlessly and electronically through the bank's underwriting, closing, and booking process? Does someone in loan servicing spend half their time on insurance tracking? i.e. are your processes scalable and efficient? Did you have a $100,000 marketing spend to generate 10 loans? All would be on the table as the person responsible for the continuous profit improvement collaborates with all areas of the bank that touch the product to improve the profit trend. And if the HELOC profit trend improves, branches will be more profitable (if they are the line of business responsible for HELOC origination).

3.  Identify Root Causes and Track Improvement. 

I'm currently reading the book Everything They Told You About Marketing Is Wrong by Ron Shevlin. In it, Ron says "The key to future profitability isn't in simply keeping customers-it's from deepening their relationships. And engagement is a necessary precondition for that to happen." There's that profitability word. What was Ron thinking? But fine, let's assume that "engagement" is key to keeping and deepening relationships. What the heck is engagement? Ron says it's whatever the bank thinks it is. And here was the chart from the book to highlight the point: 

I took a picture from my Kindle. Don't judge.

I asked Ron how to measure it, and he sent me a slide deck that showed it was measured by survey. If there was evidence that there was a strong correlation between engagement and customer profitability, I think the savvy marketer can measure it without having to perform surveys in today's AI and CRM world. But let's assume engagement deepens and lengthens a relationship. Let's look at the profit trend of a business interest checking product.

This product is much more profitable than the HELOC. In terms of ROE, fuhgetaboutit. So profitability should drive what marketing initiatives you implement.

Back to increasing engagement to increase profitability. If Marketing was responsible for assisting bankers migrate customers from low, to medium, to high engagement, how would that impact the profit picture? For one, it would lessen the operating expense as a percent of the product portfolio, because there would be no Know Your Customer, Address Checks, promotions to win a new customer, etc. And second, the deposit spread would increase because the duration (CFO term) of the product would increase, yielding a greater FTP Credit for Funds. 

By increasing the profitability of Business Interest Checking, you also increase the profitability of branches that are generally responsible for deposits, and possibly the commercial lender if the bank measures their portfolio profitability, including the deposits they brought in. 

So identify root causes with high correlation to improving product profitability, and measure Marketing on them. 

This level of accountability breaks down silos as Marketing now works with various departments within the bank to improve the profit picture, and aligns Marketing interests with those of profit centers (i.e. no hundreds of low balance checking accounts). When product and therefore line of business profitability goes up, so goes the bank.

What's stopping you?

~ Jeff

Thursday, June 11, 2020

Money Is Math. And Math Is Color Blind.

Typical conversation at my house:

Me: How much was on the credit card?!?!
Wife: Well, it's because of [reason 1], [reason 2], and [reason 3].
Me: Our checking account doesn't care about the reasons. We pay the amount on the credit card, and it comes out of the checking account. Simple math.

This conversation is amplified for households in low-to-moderate income (LMI) families. So often they have too much month left when they run out of money. Causing them to do inefficient and costly things such as remit late payments and be assessed a late fee, use a high-cost payday lender, or sometimes ignore the bill. The cascade of falling dominoes leads to societal dependencies such as 30 million children relying on the National School Lunch Program for food. 

Nobody described this situation better than John Hope Bryant, an American Banker 2016 Innovator of the Year, in my firm's This Month in Banking podcast three years ago. I encourage you to listen to it for ideas on what your financial institution can do to facilitate economic mobility among LMI families. 

I also penned a TKG Perspectives article on the Community Reinvestment Act, its obvious lack of effectiveness if you consider outcomes instead of activity, and what financial institutions can do to promote economic mobility and community development.

Hint about the podcast and the article: It's not about altruism or box checking. In Bryant's words, "you can do well by doing good."

We tend to be emotional spenders and don't consider the long-term impacts of our decisions. I recall being the "money guy" for my daughter's travel softball team. It was a club team and we had an annual fee. Club teams are important for players that want to be seen by college coaches. 

We estimated our expenses and divided by the number of players to determine the fee. We usually rounded up in case of unanticipated expenses and to help families that may not be able to afford it. One family didn't pay, and after several unsuccessful attempts to contact them, we determined they must not be able to pay. So the rest of the families absorbed that expense.

And then the family showed up to the first tournament with the nicest ride on the team. They made the decision to buy a nice car, and couldn't pay for their daughter's club softball team. I'm sure the emotional excitement of buying that car, and pushing their budget to the limit, might have made sense that day. But imagine if, instead of other parents paying that fee, we kicked the girl off of the team? Had they considered this outcome when asking "can we afford this car?" 

This is where banks can play a constructive role. Had their bank positioned themselves as an advisor, the banker would've counseled the family on cars they could afford, without pushing the family budget to the brink, running the risk of dominoes falling if one thing went wrong, and teaching sound family financial management. Perhaps even set them up on budget monitoring tools and automated savings apps. 

Because we often make foolish financial choices if left to our own devices. Think how many people don't contribute to a 401k minimally to get the full company match? People leave the company match piece (i.e. free money) on the table because they don't want to reduce their pay by their contribution. What bank financial counselor would recommend that?

Financial foolishness is color blind. We all could use a dispassionate advisor. But it's particularly acute among LMI families because of the reasons stated above. 

As John Hope Bryant said in the podcast, in the U.S., the poor can save capitalism. Banks can help make it so.

~ Jeff

Note: If you're interested in my annoying video to my daughters on personal financial management, click here. I still own those shorts.

Sunday, May 24, 2020

Memorial Day: Remember Irv Earhart

The Battle of Luzon was one of the bloodiest battles of World War II, and the second bloodiest in the Pacific Theater. Americans landed on January 9, 1945, and lasted until the Empire of Japan announced their WW II surrender on August 15, 1945.

Although Luzon was secured by March, Japanese forces continued to battle until the war's end, and even afterward. The human toll of Luzon was significant: Japan suffered 192,000 to 205,000 dead, mostly from starvation and disease; Philippines lost between 120,000 to 140,000 civilians and soldiers; Americans lost 10,000 soldiers.

Luzon was to be the strategically significant base from which General Macarthur would direct war efforts against mainland Japan, who had seized the island in 1942. Americans first seized the island of Leyte in a significant naval battle that crushed the Japanese navy. Leyte opened the door for the landing of more than 60,000 American troops on Luzon on January 9th. Among them in the Sixth Army, was the 32nd Infantry Division, and Tech 5 Irv Earhart.

Irv hailed from Elizabethtown, Pennsylvania. He was a truck driver and lived with his parents and siblings on a 119 acre farm just outside of town. He and his brother joined the Army after the Japanese attack on Pearl Harbor. His brother, Bob, went to the European Theater, and Irv to the Pacific.

The Americans landed on Luzon with little resistance. Japan's strategy was to bog down American troops, keeping them engaged, so they had diminished capability of invading their homeland. The actual liberating of Manila and the island was effectively done by March, highlighted by Macarthur's arrival in the newly liberated city to cheering Filipinos.

But the Sixth Army pushed north to route out Japanese soldiers, whose main force was hiding in the mountains and harassing American troops. It was there that General Yamashita's Shobu Group occupied a large region resembling an inverted triangle, with northern Luzon's rugged geography as a shield. Baguio, the pre-war summer capital of the Philippines, was Yamashita's headquarters. The Americans laid siege, and Japan suffered tremendous casualties, most from disease and starvation.

The Japanese made their last stand at the Irisan Gorge, where the road crossed the Irisan River, some three miles west of Baguio. Irv Earhart's 32nd Division, which had also seen heavy fighting on Leyte, was by now worn down to almost nothing. Before Baguio fell on April 27th, Irv Earhart gave his last full measure of devotion on April 9th. He was struck down by enemy machine gun fire while tending to a wounded soldier. 

Irv left a fiancé, his parents, a sister and brother. He won two purple hearts and a bronze star.

This weekend, as we push through the Covid-19 pandemic and the sacrifices we have made to beat it, remember Irv's sacrifice.

His remains are buried at the Manila-American Cemetery in the Philippines. He never returned to Elizabethtown. 

~ Jeff


Tuesday, May 19, 2020

Can The Federal Reserve's Main Street Lending Program Be Manna From Heaven for Community Banks?

"How much more abuse can small businesses take from big banks?"
~ Community Bank CEO

PPP is winding down. Community banks not only took care of their small to medium sized businesses (SMEs), but also helped big bank customers when their calls went unanswered.

Why? Because the big banks prioritized. It was a first come, first served program. And the race to the gate was intense. Ask any banker and SME CEO worried that the program would pass them by. So when they didn't hear back from their big bank, they started calling the local banks. 

Opportunity to win new customers? I think so. And bankers ought to be strategizing on how to turn those borrowers into core customers. 

Main Street Lending Program

But there's more! Now I sound like I'm selling you two Shamwow's for the price of one. Could the more be the yet to be launched Fed's Main Street Lending program? Set to launch May 29th and end on September 30th.

There are three lending facilities: Main Street New Loan Facility (MSNLF), Main Street Priority Loan Facility (MSPLF), and the Main Street Expanded Loan Facility (MSELF). In this post, I want to focus on the MSPLF, because it looks to be uniquely set up so community banks can win those local customers that have stubbornly remained with your large bank competitor.

Fine Print

Let me copy/paste a unique Eligible Borrower certification/ covenant of the MSPLF:

"The Eligible Borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the Eligible Loan is repaid in full, unless the debt or interest payment is mandatory and due. However, the Eligible Borrower may, at the time of origination of the Eligible Loan, refinance existing debt owed by the Eligible Borrower to a lender that is not the Eligible Lender." (emphasis mine)

So, as I read it, if the Eligible Borrower has a loan outstanding at a big bank, it can saunter into your office, apply for an MSPLF, and repay a loan at the big bank. And the MSPLF loan is LIBOR +3%, which is currently 3.42%. And the loan is unsecured and the amount is based on the Eligible Borrower's 2019 EBITDA. Six times their EBITDA. Oh, and no payments for the first year. Years 2-3 amortization is 15% of outstanding balance, and year 4 is a 70% balloon. And your bank need only maintain 15% of the balance and the Fed will participate the other 85% through a special purpose vehicle.

I doubt the big bank will be calling their smaller customers that are current on their loans and have a good chance of making it through the pandemic.

So why is that stopping you?


~ Jeff

Update: This from the ABA's Daily Newsbytes on the MSLP:

The Fed announced that it would hold a drop-in session on May 22 at 2 p.m. EDT and an informational webinar on May 28 at 2 p.m. EDT for potential lenders in the MSLP. The drop in session will provide an opportunity for lenders to ask questions about the program, while the webinar will give lenders a chance to learn more about the infrastructure and operations of the MSLP.
Registration for these live sessions will be limited to two representatives per institution, and recordings will be available after each program. Register now. Questions may be submitted in advance to

Monday, May 04, 2020

Guest Post: Financial Markets and Economic Commentary by Dorothy Jaworski

Readers note: You can also view this post on Penn Community Bank's website. Click here

Coronavirus Pandemic
Life as we know it changed in March, 2020. A new deadly coronavirus that originated in China quickly spread around the
world. We found that our government response was to declare emergencies and have us stay at home, confined, quarantine, lock down, and self-isolating, except for essential trips for food or medicine, or to go to work if you are an essential business employee. Gatherings and events were all cancelled to slow the spread of the virus. Panic buying of food and supplies led people to hoarding behaviors.

Every week that has passed- four so far- has felt like a year. It’s hard to remember January and February, except that we never really had any snow. Restaurants are closed. Theaters are closed. Even churches are closed and the new reality had me watching Easter church services from the Cathedral Basilica in Philadelphia on a website. It is not like any other Easter I have ever experienced.
The horrible, horrible coronavirus pandemic is not over yet. Call it COVID-19 or SARS-COV-2 but this virus is an invisible deadly threat to many people. 182 countries around the world have cases of people sick with the virus and those countries have ordered most people to stay home and closed businesses. Around the world, there are 1.8 million positive cases, 116,000 deaths, and 400,000 recoveries; there are 550,000 cases in the US alone with 22,000 deaths. For most of us here around Philadelphia, the stay at home restrictions began on March 13th, which was Montgomery County‘s date. Bucks County followed a few days later, along with business closures.
As frightening as this crisis has been, we have seen a mobilization like never before of government at all levels and the cooperation of private companies. We learned that we were too dependent on foreign suppliers of medical equipment and protective gear. US companies have filled the void. Even much of our drug supply is reliant on foreign production. Pharmaceutical companies are working on therapies for treatment and vaccine trials are being conducted already and are fast-tracked. Testing for those with the virus has been inconsistent but improving, albeit slowly. “Social distancing” and “flattening the curve” have become part of our strange new life.


We have seen people on the front lines of the battle against the coronavirus work with courage and at great personal risk. Doctors, nurses, aids, grocery store workers, police, fireman, bankers, postal workers, truckers, and others deserve our gratitude.
As the stock market faltered in March, we saw the Federal Reserve step up with emergency rate cuts and Quantitative Easing to buy bonds. As stocks worsened and bond markets traded in a volatile and chaotic manner, the Fed once again stepped in with a surprise rate cut (on a weekend!) and promised trillions of dollars to stabilize the markets. A hero emerged from the Fed- Chairman Jerome Powell. He recognized the urgency and acted with authority. He stated that the Fed will act “forcefully, proactively and aggressively.” Likewise, Treasury Secretary Steve Mnuchin worked with Congress to get a relief bill totaling $2.2 trillion passed. Both men have financial market experience and proved strong in the face of the crisis. These heroes absolutely acted appropriately and decisively.

The Economy

"Remember, it only takes one crazy thing to change everything." - Dorothy Jaworski

It’s hard to remember January and February, but the data suggest that the economy was gaining momentum before it hit a brick wall. Stay at home orders and closures of businesses cut off a large amount of economic activity. A health crisis quickly became an economic crisis.
Many workers are fortunate to work at essential businesses or to be able to work at home; 54% to 58% of employees in financial services, IT, and professional and business services can work at home. Parts of the economy are still running including the essential services of grocery stores, electric, water, cable, Internet and Wi-Fi, hospitals, banking, phone services, post office, trash pickup, and trucking and delivery services. The worst hit businesses with employees who are not fortunate enough to work have been retail stores, restaurants, bars, automobile sales, entertainment, sporting events, schools, airlines, and travel and vacation destinations. I’m sure that I will not be shocking you by saying that a steep recession began in March and will likely last for at least a quarter after we reopen the economy. Even worse, we see that it is true that 25% of Americans had little or no cash reserves.
In the midst of the crisis, stocks had plunged by 38% from the highs reached just in February. Does this percentage sound close to a Fibonacci retracement level of 38.2%? Just saying. The actions of the Federal Reserve and Congress stabilized the markets and we have seen a rally recovering about half of that amount. Compounding the coronavirus crisis and its negative effects on markets and the economy, oil prices were plunging as a dispute broke out between Saudi Arabia and Russia, threatening our own energy independence. Agreements to cut production have finally
saved oil prices.
Sadly our record expansion of 128 months came to an end in February, 2020. I had believed that we would continue the expansion into 2021, but that will not happen. The government-imposed shutdown brought our $21 trillion (annualized) economy to a screeching halt. What we thought would be a disruption in the supply chain from China, who was the first to close their economy, rapidly became a precipitous decline as we moved to keep people at home, many not working, and to close businesses. Initial unemployment claims in the first three weeks of shutdown totaled an astounding 16.8 million, or 10% of the civilian labor force.
The actions taken by the Fed stabilized markets. The actions taken by Congress to pass relief bills in three phases, totaling $2.3 trillion so far, will try to stabilize incomes for individuals and businesses. But for all of these actions, our economy is still not reopened. How we do it safely is still a matter of debate and planning. But reopen we must, before there is not an economy to come home to.
Before I scare you with some economists’ projections of dire declines that are floating around, I’ll remind you that much of the economic activity can recover and continue. There will be pent-up demand that I believe will get us growing again. At this point, once recovered, the economy will grow but at a slower pace than the 2% to which we had grown accustomed from 2010 to 2019.
Forecasts for 1Q20 and 2Q20 range from an annualized -9% to -40% (the worst number is that of JP Morgan), representing the largest quarterly decline in economic activity ever. These numbers are between $1 trillion and $2 trillion just for the quarter! Unemployment is projected to reach 15% to 20%, before dropping back to 10%, then lower. In the 3Q20 and 4Q20, the economy is projected to bounce back to an annualized range of -1% to +23% (again JPM is highest). In 2021 and beyond, we will continue to recover but because of the large increase in government debt from the relief programs and the fact that increased levels of debt to GDP suppress growth, many estimates call for GDP in the +1% to +2% range.


The economic projections just cited were made after most of the Fed programs and the Congressional relief bill, or CARES Act, was enacted.
The Fed took forceful action and cut rates by 150 basis points during March to take the Fed Funds rate to 0%. Remember, Fed policy of this type takes six to nine months before it is ingrained in the economy, hopefully ensuring that the eventual recovery is stronger than it would have been. They also implemented large, aggressive borrowing and purchase programs for Treasuries, Agency mortgage backed securities, corporate bonds, municipal bonds, loans, commercial paper, bank lending, and small business loan programs. Congress passed $2.3 trillion in three phases of relief bills to give loans and direct payments to individuals, state and local governments, small businesses, and front line hospitals. Will it be enough? And for how long can people and businesses hold on?

Interest Rates

Rates fell dramatically in 2019 and again in the first quarter of 2020, due to the emergency situation of the coronavirus and partial economic shutdown. The Fed Funds rate is back down to zero and the rest of the yield curve began to follow. I call it the "race to zero". The two-year Treasury yield is at 0.23% and the ten-year is 0.74%. With recession looming and a strong recovery projected but not certain, rates will remain low. Inflation never did make it to the Fed's target of 2% and is now declining, which is the typical recessionary response to companies' lack of pricing power (not to mention the plunge in oil proces). The risk now is that inflation falls down to zero or goes negative, to cause deflation. For manufacturers, capacity utilization is already low at 75% and will no doubt head lower. Finally, from a technical perspective, the velocity of money is already extremely low at 1.43, and it will head lower as we work to emerge from recession. The bottom line is that rates will remain very low for a long, long time.

Time to Reflect

We all have too much time on our hands. It is very hard to work at home and stay at home, too. In our lives, we haven't experienced a crisis like this. In my career, I've seen a lot of crises and we've overcome them all- hyperinflation of the late 1970s and early 1980s, the crash of October, 1987, the real estate crisis of the early 1990s, the Long Term Capital Management and first sub-prime crisis of 1998, the bursting tech bubble in 2000, September 11th, and the morgage, sub-prime, and financial crisis of 2008-09. This is clearly a new situation with a forced shutdown of the economy, which caused a selling panic, volatility, and a liquidity squeeze. One constant throughout has been the Federal Reserve, who stepped into each of these situations to calm and stabilize markets.

For all of us, we have had time to reflect on our new, changed lives. Will we be afraid to venture out? Go out to eat? Go to games and concerts? Sit next to other people? I don’t want to live in fear; none of us do. But like all of the crises of the past, we will make it through. I have no doubt. Be safe!

“But you knew there would always be the spring, as you knew the river would flow again after it was frozen.”
– Ernest Hemingway

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.