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.