Live from DCG's Annual Conference

Live from the 2023 DCG Annual Conference, join Vin and Zach as they cover the key issues being discussed on stage. They are joined on the ground by three conference attendees (George Kelly of Liberty Bay CU, MA; Jon Schmaderer of TriCounty Bank, NE; Karyn Hale of Union Bank, VT) who sit down for an open forum on the opportunities / threats to their businesses, the outlook for their balance sheets over the next year, and key conference takeaways.

For more insights and ideas, visit DCG at DarlingConsulting.com or follow us on LinkedIn.

Transcript

[Vinny, 0:00]:

Welcome to On the Balance Sheet season 2, episode seven. Another special episode. Today we are recording live from the Marriott Long Wharf in Boston, MA, for the 39th Annual Darling Consulting Group Annual Balance Sheet Conference, and it's just great to be back in person. For those uninitiated, this is the first time in three years we've been able to get back to our traditional host here in Boston. The last few have been disrupted by COVID and so forth. It's just been great. The energy around the building, the participants, people are just really kind of excited to be around. Unfortunately, the weather didn't cooperate for the lion's share of this, so we had folks come from different parts of the country with the temps well into the 90s and yet, here we are. It's like mid-February, it feels like almost, but in all seriousness, just a great event, I think. Start to finish, it really went very well today. We've got an episode planned for you. We've got three different guests. Zack will kind of go through those, have an opportunity to listen into some of the sessions and even facilitate some of them. You can just tell the energy has been really, really good amongst everyone. I've got a few takeaways I'd like to share before I throw it over to Zack. One of the things that was really front and center throughout this whole thing and intuitively and think it makes sense to everyone was certainly liquidity. Liquidity preparedness, collateral management, the overriding theme of the cost of liquidity continues to go higher. How banks and credit unions are managing through this environment. That was front and center on everyone's mind. I will tell you in the peer group session that I moderated with my colleague Mike Mitchell, we queried the entire room, and overwhelmingly, everyone wanted to talk to each other about liquidity and different facilities and programs to help themselves, you know, fund their balance sheet. So, that was something that definitely stood out to me, and the other kind of highlight for me personally was listening to Chris Low, the chief economist from FHN, and for those who follow our podcast, we've already released a special episode with Chris. So, hope you had a chance to consume that, but Chris's forecast, his outlook for the economy in our conversations with him, I think he was a little more positive than maybe some other economist you might, kind of, read and follow. That doesn't mean he doesn't have a recession baked into the 2024 year. So, I thought it was really interesting listening through what he had to say. And then of course, from a social perspective, we had a terrific lobster bake, New England-style lobster bake, and it was fun to watch folks from other parts of the country try to figure out how to get into a lobster. So, all in all, just a great experience, and I thoroughly enjoyed it. It was really, it was sort of invigorating. You walk away and you say, 'Man, that was awesome.' We haven't had that sort of feeling in a while, right, Zach?

[Zach, 2:50]:

I mean, absolutely! I think that was the sentiment that I got for all 48 hours, right? Sunday night through Tuesday, you know, there were so many comments saying how great it was to be back in person. That was great to have a couple of cocktails too and open up some lobsters, which is always, you know, one of the big highlights on Monday night. You know, certainly doing that right on the harbor downtown. And, you know, for those who haven't been before, other than just being in person and the energy, like you said, that goes with going into sessions, the peer groups, the keynote speaker with Chris Low also as the chief economist coming and speaking Tuesday morning. A big piece of it is really the diversity of the tracks that we offer. So, there's a whole core track right then where we're able to go through the basics of ALCO from liquidity management, rate risk, developing strategies, talking about risk tolerances, doing case studies, and that's a whole almost two-day track. If you wanted to be on the more balance sheet management, liquidity deposits, lending some more tactical things in that perspective, we have that. All those presentations get done twice. So, you can kind of pick one each day if you want to. If there are conflicts, we also have a whole model risk management track for some of the bigger banks or some of the more quantitative heavy folks, which always get really great reviews. And then you have a whole credit union track too because there's always some idiosyncratic things in that space, where some of our clients who are credit unions like to go. So, I think it's got something for everybody overall. And I know you talked about liquidity, big, big takeaway. You couldn't go anywhere else in there without hearing the word deposits come up certainly as well. And I think I did my peer group with Keri Crooks, you know, our colleague Keri, and most of it was talking about deposits and deposit generation, deposit inflow generation strategies, ways to not see the cannibalization, ways to figure out how to deal with this rapid cost of funds increase. So, I think that was a really productive kind of peer group setting, and I think people liked that atmosphere. They also liked having presentations where you get some ideas. I know Joe Kennerson, Justin Bakst, John Weiner did a couple of cool things analytically talking about predictive deposits and analytics on that front. So, I think that was a tremendous presentation as well. And then I did one with Matt Pieniazek, our president, on the lending side. And I think, while liquidity and deposits have been a big, big, big focus, you can't lose track of the fact that lending is still a pretty important piece. And just thinking through some creative ways to get through some of the margin challenges with putting on loans today in this inverted yield curve, this lender's dilemma. We're working through ALCOs right now. And then talking about derivatives, talking about rate risk, how falling rates over time is usually the worst case for the industry. So how do you straddle? Near-term rising rates, long-term falling rates. So we had some really good productive discussions there too, and we can go on and on. We had some of the great speakers talking about the credit environment, commercial auto, you know, things like that. So there was really something for everybody. And I just can't get over how excited people were to kind of be back and talking. There was so much energy like you said.

 [Vinny, 5:46]:

Yeah, years ago, I remember my first conference. I remember having the opportunity. George was giving some opening remarks, and he always said the foundation of that conference was that we hope all of our attendees have one major takeaway that they can bring back to their institution and hopefully capitalize on that takeaway. So again, it was a great couple of days and long few evenings which is always a lot of fun. And so today, we actually wrangled, if you will, three different guests, and you're going to get them back-to-back-to-back. And we asked some of the same questions to all of them, right Zach?

[Zach, 6:24]:

Yeah, we tried to keep it consistent and just some good topical current questions. And we had Jeff Kelly, who was the Chief Strategy Officer at Liberty Bay Credit Union in Braintree, MA. We also had Jon Schmaderer, who is the President and CEO of The Tri-County Bank, out in Stuart NE, and then we had Karyn Hale, who is the CFO up at Union Bank in Vermont. So, some interesting answers. It was great to have them, you know, join us and take some time out, and I think you'll really enjoy some of their thoughts and perspectives.

[Vinny, 6:55]:

So, without further ado, here comes Jeff, Jon, and Karyn

[Zach, 7:01]:

And we are live here at the 2023 DCG Balance Sheet Management conference, and we're joined, Vin and myself, by Jeff Kelly from Liberty Bay Credit Union. And Jeff, thanks so much for joining us today. And just could you give the listeners a quick background, title, kind of role at Liberty Bay, how big you folks are, where you're located? And then we can now get into the real big-hitting questions for.

[Jeff Kelly, 7:23]:

And thank you for inviting me over. Well, as you mentioned, we're at the conference, it's been we've just wrapped up day one, a lot of material, a lot of very, I guess you could say, timely material given the current landscape. And so, Jeff Kelly from Liberty Bay Credit Union based out of Braintree, MA. We're about a $750 million institution with about 25 members, been around since 1917, and I have been there for about 9 years now in the Chief Strategy Officer role.

[Zach, 7:47]:

Terrific. And what we're planning to do here is just ask a few folks kind of the same questions. So we'll see how all your answers kind of come through, but obviously, 2022 was an interesting year, a lot going on. 2023 has started. We're halfway through it here, and there have been a lot of issues in the industry, some challenges. From your position as Chief Strategy Officer, right, at Liberty Bay, what are the biggest challenges you're seeing or experiencing as we've gone through the first part of this year and as we continue through 2023 and into 2024?

[Jeff Kelly, 8:18]:

Yeah, absolutely. And so in a very short period of time, we've lived through multiple cycles here, the what I'll call the sleepy times pre-COVID where it was a lower interest rate environment, kind of challenging in its own ways. But now post-COVID, you certainly see Fed intervention. You see a lot of the liquidity and deposit pressures that we're starting to see. So in a very short period of time, very different aspects from a managerial standpoint that we need to manage. And so top of mind is competition. As we talked today at various modules during the deposit competition, deposit pricing, cost of funds is certainly jumping like I have certainly never seen before, and the strategies behind that and working with membership has been a challenge, and that, on top of just the fierce competition from Fintexs and our neighboring competitors, has made an interesting environment.

[Vinny, 9:09]:

Hi, Jeff, Vinnie here again, thanks for joining us. I guess, like Zach alluded to, we're gonna ask a couple templated questions here, and I guess I already sort of maybe know half of your answer. But really, what do you think Liberty Bay's balance sheet is going to look like 12 months from now?

[Jeff Kelly, 9:23]:

It's a very good question. I think there are a lot of different aspects at play here. First and foremost, being just the deposit growth aspect. I had mentioned earlier that we're $750 million in assets with a growth mindset. So we're embracing technology. We're embracing the upscaling of our employee base. And so the hope is that our goal is certainly to get over a billion dollars in the not-so-distant future. But what it takes to get there is gonna be really just, you know, in my opinion, data mining. Customer expectations are much higher these days than they ever have been in my opinion. So how do we meet the members where they need us to be in terms of product, process, and service? So my hope is that we continue to grow diligently. We have a very healthy capital profile, the ability to expand and grow, and we have the right leadership team to do that and the right staff and talent base to do that. So, my hope is I come back and talk to you next year, and we're north of 800 million and then in the not-so-distant future, we're north of a billion and really competing here.

[Zach, 10:23]:

Jeff, kind of a follow-up to that probably the first question to talk about challenges we talk about what the balance sheet may be looking like over the next couple of years; what opportunities, do you see that lie in the deposit space for you? Do you see more on the lending side or a combination? What do you see there as positives? I think we always get kind of mired in these challenges and issues, but hey, you know, people are still making money. The banking industry is, knock on wood, no big credit issues just as of yet. So, what do you see as opportunities going forward for yourself as well?

[Jeff Kelly, 10:51]:

So, you know, I don't want to use too many buzzwords here that are just that we read in the Wall Street Journal every day. But AI technology, RPA, really leveraging and spending the money to enhance our technological capabilities and really allow us to focus on the member. So, if we can simplify processes and really have our staff focus on the member experience, I think there's a great opportunity there, both lending and on the deposit side. And really, it comes down to process technology, embracing innovation, and having that mindset every day when we come to work.

[Vin, 11:24]:

Well, that's great. Now, this is our first in-person conference in what, now, four years. It really has been four years. Was this your first time here, Jeff, or...? 

[Jeff Kelly, 11:33]: 

No, between digital, if you will, or remote and live, I've been to about five conferences now.

[Vinny,11:39]

Not your first rodeo, as they would say, and as you know, we're almost at the end of day one. For a local guy who's heading home tonight, his day is over. For some of the rest of us, our day is sort of just beginning, I guess you could say. Unfortunately, we're just sort of acknowledging that, but your thoughts on day one at the conference?

[Jeff Kelly, 11:58]:

As I was mentioning to some of my other colleagues downstairs, timely advice and timely content in terms of where we are today. Really drilling down into data, focusing on documentation, making sure that you really have a plan and a strategy that you can support in this environment. And all of the sessions were unique, and it can get a little intimidating trying to build out your little roadmap for the day, given the number of different sessions that you have available to all of us. So I was excited to come here today, back live as you mentioned for the first time in four years, and see some familiar faces and meet some new ones. And so, I'm looking forward to day two and really just continuing along that path.

[Zach, 12:38]:

Well, Jeff, thanks so much for being with us, and hopefully you can stay and get a drink or two before you hit the road, and maybe Vin will get him lobster to go, maybe a couple for the family and for the kids. So, exactly.

[Jeff Kelly, 12:49]

Always gotta bring dinner home, right? And thanks again.

[Zach, 12:53]:
 
 Well thanks Jeff. And we are now joined by John Schmaderer from The Tri-County Bank in Stuart, NE. John, thanks so much for being with us tonight. Just to start, can you give the listeners a quick overview of The Tri-County Bank and how big you are, where you're located, your role, and how long you've been with the institution?

[Jon Schmaderer, 13:13]:

Yeah, I'm the President and CEO of The Tri-County Bank in Stuart, NE. With four offices, right at 200 million in total assets, mostly Ag-acre business and rural housing, we specialize in. I've been with the bank my whole life, so part of generation three. We have three generations, four members, part of our team too. So, I started my banking career mowing the lawn and shredding paper. So, my mom would send me down to the basement with my buddy, and we would shred paper. I don't remember if we got paid or not, but we were occupied and we had a great time, and we still talk about that.

[Zach, 13:52]

That, and you're still with the bank, so it's good. It was a good first experience. So, what we've been kind of asking folks here on this episode is, obviously, 2022 was an interesting year, 2023 has certainly been a tough first half. I think with margin compression, things like that in the industry. But what are the challenges you see kind of in your world, what you've experienced so far, maybe as this year goes on or just expectations for the challenges facing your bank, but also the industry over the next six to twelve months?

[Jon Schmaderer, 14:19]:

You know, the challenge for us has been, we certainly manage for interest rate changes all the time. I don't think you can and probably should manage for a 5% increase in right around a year. And that's been tough on us all. You know, my greater concern is that that's tough on our customers, our borrowers as well. So while I'm excited on the deposit side, people coming in and they're actually getting paid for their deposit and their FDIC insurance, you know, on the loan side, sometimes that's a delayed reaction. So while the Ag community is really strong in Nebraska, particularly North Central Nebraska right now, that increase is a delayed reaction. So we're trying to manage for that with our borrowers.

[Vinny, 15:02]:

And John, this is Vinny, thanks so much for traveling to Boston. I'm sorry we, you know, we gifted you with this absolutely horrible weather. I mean, you only see a winter coat. We didn't get blessed with great weather this time around. But as Zach alluded to, we're kind of just going through some standardized questions, and I have the pleasure of asking you, where do you see your balance sheet 12 months from now? What does it look like?

[Jon Schmaderer, 15:25]:

You know, we've been focused on growing our relationships for many, many years. And so that gives you some reference points, and you can do that in all types of scenarios. So, there are opportunities when rates rise, there are opportunities when rates go down. And so, I would expect it to be larger. Now, sometimes the metrics with pricing and leverage and things like that would change the size of your bank. But, you know, I would expect a year from now that our relationship base would have grown between 8 and 10%.

[Zach, 15:54]:

"John told me, then it must have been 6-9 months ago, John, we were in a meeting, he said, 'We're playing defense on price, offense on relationships,' and that's one of the things that stuck with me. So, I can absolutely attest that I know that's what they've been focused on. And you're kind of shifting to, we talked about challenges, opportunities. John, what do you see as, you know, kind of the glass half full look for yourself in terms of where you expect growth or are you expecting growth and where do you see good opportunities for you to keep growing in your markets?

[Jon Schmaderer, 16:23];

Yeah, sometimes events like this really cause maybe some business transitions that probably needed to happen and don't in the normal course of business. So I think our opportunity right now in the AG and agribusiness is really to get that next generation involved. And we find that those next generations, when they come in, when things are a little tough, a little challenging, they end up making it because they have to start right away in the challenging time and they figure out how to do that. When they come in when things are really great, and then, you know, obviously in the AG world, that fluctuates a lot, probably more so than CRE and other things. It's a really tough adjustment to come in in a good time and then two or three years later, they experience a tougher one. So I think our lenders and our relationship bankers are really geared towards getting those transitions that are so critical to North Central Nebraska.

[Vinny, 17:17]:

Yeah, John. So, day one of the conference, I'm curious, what's your reaction? We're almost done with the day, with that aside, what has been your reactions and any takeaways, any themes, anything that stuck out to you on day one?

[Jon Schmaderer, 17:30]:

Yeah, we cheated a little bit because I brought my nephew and my son, who are part of our banking team. And so, we were actually able to hit all of the - every session between the three of us. And we never sat in the room at the same time, except for during our peer group and then during the last one. So it'll be interesting to compare notes once we get back. But obviously, the deposit strategy was important. Zach did a lending seminar that we were able to attend, and then, you know, CECL was excellent as well. So I look forward to tomorrow morning's economic forecast because that'll be interesting.

[Vinny, 18:08]:

Well, you're in the hot seat because Chris Low just sat there not too long ago, and I think he gave us a preview of what he's going to talk about. And, you know, he's more positive than maybe others would be, so that's a good thing. But I guess with one parting shot, I gotta ask, will Nebraska ever be a factor in the Big 10?

[Jon Schmaderer, 18:26]:

You know, as long as I continue to, we continue to invest in season tickets, I'm going to say no. But the minute we drop those, we're going to win it all multiple times. So I don't know what to hope for right now.

[Zach, 18:40]:

John, thanks so much for joining us. We really appreciate you taking the time and have a great day tomorrow.

[Jon Schmaderer, 18:46]:

You have a great crew, and we love the relationship that's helped us move forward in so many ways.

[Vinny, 18:51]

Welcome back to the BCG Annual Balance Sheet Conference. We are pleased to be joined by Karyn Hale. I've got the pleasure of working with Karen and her institution, and I dare call us friends now. You know, I'm not so sure I can say that. I consider you a friend.

[Karyn Hale, 19:08]:

You can say it. I consider us friends.

[Vinny, 19:11]:

Well, thank you for joining us, particularly right before dinner. It's been a long, you know, action-packed day, if you will. Karen, tell us a little bit about yourself and the bank.

[Karyn Hale, 19:18]:

Well, thanks for having me. I'm Karyn Hale. I'm the Chief Financial Officer for Union Bank, headquartered in Morrisville, VT. We are about $1.4 billion, rapid growth over the last three years. Like everyone, we have 20 locations in northern Vermont and New Hampshire. I've been with the bank for about 18 years now and in the CFO role for nine. It's been a wild ride, the last three, that's for sure.

[Vinny, 19:52]

Having the opportunity to work with you folks, I get to see kind of the results, and I probably say this more than folks believe me, but it's always sort of refreshing to come in there because I know you folks have challenges like others, but yet, your bank has done very well. So yeah, this sort of goes into our first question. We've been asking everyone who's joined us what you folks view as opportunities moving forward. And also, I guess the second part of that question is on the other side of the coin: what do you view as a threat? 

[Karyn Hale, 20:24]:

Being in northern Vermont and New Hampshire; that area of the country doesn't seem to be impacted as severely by recessions or booming economy. I mean, we kind of ride in the middle of a lot of the time, and that can pose opportunities and threats. Along with that, in Vermont, there's been continued bank consolidation that usually creates a lot of opportunities for us as the local people want to continue to bank with Vermont domiciled institutions. That's not always the case, but it has created opportunities for us in the past, and we're still seeing that today. We have, as I mentioned, we've grown quite a bit, and that's been not only because of the pandemic, but also over the last five years. That's been by design. We've continued our expansion in New Hampshire and opened three new branches over the last four years in Vermont as well. The expansion of our geographical footprint creates opportunities for us as well. Well, challenging right now, probably for most people, is funding and growing deposits. Trying to attract new money is difficult. Luring people away just based on rate is a little easier, but I don't know that that's really gonna prove to be a long-term solution if you're trying to grow your institution.

[Zach, 21:36]:

So Karen, question #2, and I'm going to ask it a little bit differently than some of our other guests we've had. Is the first six months of this year. I think most people are off on their budgets and just the projection. So how about you can give us the next 12 months where you think your balance is going to be, kind of going forward here? I say that kind of tongue in cheek. Just do you see yourself growing a lot more? Is it, you know, is it going to be more wholesale-based? Do you have some things in the fire? In terms of the deposit side, you know, what are you thinking about for the next 12 months on the growth side?

[Karyn Hale, 22:04]:

Ohh, don't I wish I had a crystal ball for all of that. But you know, we, as I mentioned, we've been in a growth mode, and we were predicting similar results for 2023. I think we had estimated around a 10% growth, total assets, and funding that with a combination of deposits and wholesale funds through the first six months. We've been very fortunate. We have strong loan demand both on the residential side and commercial side. Funding continues to be a challenge, and so far we've been doing the majority of the funding of that with wholesale options and the combination of FHLB advances and brokered deposits. Going forward, based on what our pipelines look like right now, I mean the loan demand is there. I think we just really need to continue to manage the funding side so that we can minimize the margin compression that we're seeing. I don't know how much we'll really grow these next six months for sure. We also have a very strong municipal business line, and that's a very competitive market. Competitive market right now, and more so because everyone's competing for those deposit dollars. That's the quickest way, other than business deposits, to get some meaningful growth. And so that arena has certainly ramped up this mini season. 12 months, I think we'll stay flat. I don't think we'll shrink much, but I don't think we'll grow a whole lot.

[Vinny, 23:31]:

And flat is virtually growth compared to what you're probably going to see amongst a lot of your peer group. And what's always kind of interesting to me is like David Silverman, the CEO, he always makes remarks that we're always seem to be behind the Boston economy and there's always a lag, and it clearly has not gotten to you. I'm always surprised by every time we look at the numbers, and you spoke to your loan demand, particularly on the residential side. You made a remark earlier that the residential loan pipeline was pretty strong, and I know you know Steve, one of your key folks, always talks about that. What do you attribute that growth to in that pipeline? The fact that that's still going on because in other markets, it's really quite quiet.

[Karyn Hale, 24:16]:

Actually, I was talking with Steve about this earlier today, and when the 30-year rate hit 7%, that was kind of the price point that kind of slowed people down a little bit. When it came back down, people are still having life events, you know, so they're still looking for new homes, building new homes. One of the challenges that we have, like many others, is inventory. There isn't a ton of inventory. So our construction business is very strong. The first three months out of the year, or the first three months of 2023, it's winter. Nobody's really doing a lot, you know, in northern Vermont, New Hampshire. But over the last probably two months, people are back out, you know, looking to make those life changes. And so we've really seen that tick up just in that two-month period of time where the demand is just strong. I think it's not refi stuff, it's new purchase activity, a little bit of refi but not a lot. I mean, who wants to refi out of a 3% mortgage? But the demand seems to be there. There aren't a lot of people moving to Vermont now. That was pandemic time when a lot of people moved. And then what I mentioned before is our geographical expansion where making more of a presence in New Hampshire, that's part of it. And we're partnering with some other mortgage brokerage firms that are looking to sell loans or, you know, help us find the business. And we've made some great partnerships that are helping us continue to expand.

[Zach, 25:38]:

The last question we have for you, Karen, I'm standing in the way of all of us going to have lobster. So day one is over, pretty much of the conference. Any interesting things? Anything you liked today from the presentations or anything looking forward to, you know, tomorrow?

[Karyn Hale, 25:53]:

I think today was a great day. On one hand, a little depressing, you know, how the challenges that we're all facing and then all the added pressures of what the regulatory expectations are going to be. I think a lot of us are leaving thinking, man, we have a lot more work to do just to satisfy those requirements, but it's all good information. And I think we all, especially with you folks from Darling, we have the tools to accomplish those things. It's just we're in an unprecedented time, and we're all experiencing things that we haven't had to do. But what's nice about this, you're all in it together kind of thing. So you're not there by yourself, and being able to network with other people, either from your own state or from other places across the country, you get to talk about those things and the challenges. And not that you're divulging any deep direct corporate secrets when you're talking about these things, but you may pick up a couple of ideas from people that you wouldn't expect to, so. So that's great, and looking forward to more of that tomorrow.

[Vin, 25:50]:

Well, that's great, Karen. Thank you so much for joining us. We appreciate it and hopefully enjoy day two as well.

[Karyn Hale, 26:56]:

Thank you very much.

[Vinny, 26:57]:

That’s a wrap on episode 7 here from the DCG conference. Hope you folks enjoyed this one, and stay tuned for more episodes of On the Balance Sheet.

[Outro, 27:08]:

On the Balance Sheet is a podcast produced by Darling Consulting Group, DCG. All views and opinions expressed by hosts and guests are solely their own and may not represent those of DCG. All third parties are independent entities and are not affiliated with DCG. This podcast is intended for informational and educational purposes only and is not considered as advice. All views and opinions expressed are based on the information available at the time, it may have changed on current market and other conditions. For more information about DCG; please visit www.darlingconsulting.com or email us at info@darlingconsulting.com. Today’s background music is provided by John Sib at Coma-Media and can be found on pixabay.com.       

The text of this transcript was generated by an artificial intelligence (AI) model, and its organization, grammar, and presentation enhanced by AI, and as such may contain errors or inaccuracies. DCG is not liable for any damages, however caused, that may result from any use of this content.