Chris Nelson, Nelson Capital Advisors

In this month's episode, Zach and Vin are joined by Chris Nelson, Founder and President of Nelson Capital Advisors (and formerly of Bangor Savings Bank). 

Chris talks about his early days, which took him from the broadcasting booth to the Trust Department and ultimately into the CIO’s chair. Along the way, Chris shares some of his most valuable lessons regarding the importance of managing liquidity, the efficacy of the ALCO exercise, the pitfalls of “tunnel vision,” and what he calls “rear view mirror management.”

Chris also explains his current role as both advisor and educator for financial institutions. He reminds us that the bond market is not a “charitable organization” and that all investment decisions must be contemplated within the context of four critical questions. 

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

Transcript

[Vinny, 00:00]

Season 2, episode 12 of on the balance sheet and Zach today with the unique guest, if you will. It's, I guess, our first guest who is neither a banker nor an economist. Instead, we have somebody who's kind of in between. We have Chris Nelson joining us from Nelson Capital Advisors. Chris is the founder and president of that firm - it's an investment advisory firm as well as he's got another outfit, the Bond Investment Mentor, which is more of an educational arm, but he's got a ton of experience. He's worked in community banking on Cape Cod and more notably up in Bangor, ME, but really neat episode. I think our listeners are going to love Chris. He's just got tremendous pipes, if you will, that shines through. But there's a lot of lessons he's shared from his experience in banking.

[Zach, 00:49]

Yeah. Then I think we have a great slate of questions here for Chris, and you're right, I mean, he was in the community banking space for over 20 years, and he was chief Investment Officer and the Director of Finance and Treasury at Bangor Savings Bank up here in in Maine, but now in Nelson Capital Advisors and a bond investment mentor. So, we're going to go in kind of a bifurcated way. We'll talk a bit about his background, again into how he views the investment portfolio and how he kind of, from that perspective, into his current job, which is investment advising Banks and credit unions on that space, and certainly it's been a pretty good three years in terms of topics and issues in the investment space, so we're definitely gonna’ get into some of the concepts that he's seeing and hearing in his conversations. So pretty packed episode here, pretty aggressive agenda, but we're really looking forward to talking with Chris.

[ Vinny, 01:36]

Yeah, a must listen for those newer to the investment portfolio, and Chris is a captivating speaker so without further ado, Chris Nelson.

[Zach, 01:50]

Welcome to On the Balance Sheet. We are joined here today with a very special guest, Chris Nelson, President of Nelson Capital Advisors, but also a former DCG client for, Chris, a very long time. And what we want to do is kind of jump right into that to start which is, you know, can you tell the folks how you got into the banking industry and how you kind of met up with us and Darnell and kind of walk us through that, please.

Chris Nelson, 02:14]

Sure. I came into banking through what some might consider a very nontraditional path. I actually, when I when I first was kind of building my career path, I actually had nothing whatsoever to do with banking, investments, finance. I actually spent several years in broadcasting and did, I worked in radio for a number of years.

I did a lot of behind the scenes work in the Boston market, and then eventually ended up on Cape Cod. For those of the listeners that know the Massachusetts area, I lived on the Cape for many years. And so, I started down, I went down there initially to do broadcasting and I was kind of starting to feel like I needed to do something different, and I'd always had a fascination with the whole idea of business investments, finance. It was just an area that I had an interest in.  And so, I began kind of taking a look at kind of what my options and how do I make that kind of a shift. And so, I began making a transition. I tried a few different things in the investment world. I was a mutual fund salesman for a very short period of time, and I didn't like that at all. Did some work in the insurance industry for a while assisting insurance agents and so forth. Then, eventually, I ended up taking a position as an investment assistant for a team of investment portfolio managers at the Trust Department at what was then Cape Cod Bank and Trust in Hyannis, and so that's how I began my journey in the banking world was through the Trust and the Wealth Management side of the house. And gradually, over a number of years there, I moved from being an assistant; I actually worked with them for several years in their wholly owned broker dealer subsidiary.  I was a broker and a principal of that firm for a few years, and then they were making some changes in the Trust Department and the head of the Trust Department came to me and asked me if I would be interested in working with the portfolio managers as a PM.  And so that was how I made the jump over to being a portfolio manager full time. So, I was managing client portfolios then and kind of just continued to build my experience there and eventually was looking to kind of grow from there and an opportunity presented itself to head up an investment team., as opposed to just being on the team, but the thing that kind of caught me a little bit was that it was in Bangor, ME. And so, I was like, whoa, what am I getting myself into here? But I made the made the jump and went to Bangor Savings Bank and started out there as the head portfolio manager, head of investment management for their trust department. And so that's how I ended up there, and after a few years of doing that, I was approached by the CFO who explained to me that he was looking to make some changes in how his function was built. He wanted to expand the kind of the finance and treasury function. And so, he said, hey, you know, do you have an interest in kind of building this for me? They really didn't have a a well-developed team there yet. And he said, you know, this would be an opportunity for you to kind of build some things here, which I thought was kind of interesting because how often do you get to build something inside of a community bank.

You know, so I began doing that and eventually phased out of the Trust Department and became the Chief Investment Officer and the Director of Finance and Treasury for the Bank. And there, I was responsible for, you know, as you would expect, managing the investment portfolio given my background. But I was also responsible for things like the daily funding and the liquidity management for the bank, the whole ALM side of operations and interest rate risk management, which was how I got to meet Darnell and begin working with Darling. I was also doing loan and deposit rate setting for the bank and guiding that, hedging and derivatives and international services, it was, you know, kind of a lot of different areas that eventually got pulled in that I was responsible for working and overseeing.

[Zach, 06:31]

Chris, that was a great answer, great overview, and I was just writing some notes down. There are four things you mentioned there at the end that I think are incredibly topical right now, but are always, you know, on folks’ minds, at least our listeners’ minds. You mentioned the investment piece, liquidity management, loan deposit rate setting, and hedging, right. So, then with your, you know, kind of 20 years or so at Bangor, what were some of the lessons you learned in, you know, guiding a bank that size because the Bangor is not a small bank in in the northeast for those who are unaware, any lessons you learn, you kind of throw out the way that kind of helped you in what you're doing now, but also, you know, in mentoring and helping folks who you were kind of growing at Bangor?

[Chris Nelson, 07:12]

Yeah. I mean, you're right. I mean, the bank grew, I mean, when I joined the bank back in 2000, 2001, the bank had total assets of, I wanna’ say, it was around 1.4 billion at the time. And when I left Bangor Savings, we had just crossed over the $6 billion mark. So, there was quite a bit of growth in that time. But I think the lessons that I learned, I mean, first and foremost on the investment side because that was kind of the world I knew.  What I discovered pretty quickly was what I didn't know, because investment management for banks is very different from a lot of other forms of portfolio management.  And managing investments, you know, I came into that role thinking, oh, it's a large, it's a large, fixed income portfolio. I've had years of managing portfolios. I have my chartered financial analyst designation. How difficult can this be?  And I realized pretty quickly that the the mindset and the perspective that you have to have when you're managing a bank or credit union portfolio is night and day from what you normally think about when you're trying to manage the portfolio, there's a lot of other moving parts in in terms of that, so I think that was probably one of the biggest lessons I learned early on was just understanding that It was a slightly different animal, I think. Another lesson I learned was the crucial importance, I mean, when you think about banking, you're always talking about, you know, the importance of capital, and putting capital to work, and managing capital. And that's certainly, you know, I think vital, but right on top of that is the crucial importance of managing liquidity.  I have a colleague of mine that years ago had said to me he said, you know, he said when you're managing a bank, he said, if you've got good levels of liquidity and capital, you have options.  And they said if you don't have one, the other, or both, or enough of one, the other, or both, you start to have much fewer options in the process. And so, I know when I was first building the Finance and Treasury function out at Bangor, one of my key areas of focus was on how do I make sure that the liquidity management process was sound and solid?  Capital wasn't something I was necessarily overseeing, but I certainly had to keep it back of mind.  I think I took kind of a portfolio manager approach to liquidity management. And so, for me, it was figuring out how can we make sure we have multiple options on the table for places to go, multiple resources within each of those channels. You know it was kind of building up that, that diversification, and so forth, and making sure that we had the tools necessary, you know, from the basic stuff right up through the Federal Reserve, which I mean back in, you know, back when I was first starting, it was just the discount window at that point. But I mean, I'll tell you from my experience, the one thing that allowed me to sleep nights in the fall of 2008, early 2009 was knowing that if things really got dicey, I could get my hands on a very large credit card balance, with a phone call, from the Fed because we had not only established our discount window line, but we had already collateralized it, and I'm not talking some token amount. We had it sitting there that it was ready to be drawn upon, and I could get my hands on a large chunk of money in about 10 minutes. That's the kind of peace of mind that you want to have under those circumstances. And then, I think the last lesson Is the importance, this will play right into your wheelhouse, guys, the importance of the ALCO process.  You know, one of the things I learned early on was the need to take the whole ALM and ALCO process from kind of what one of my clients calls a check the box exercise, and really taking almost more of a defensive stance is, you know, OK let's look at the risks. Let's look at the report. What does it say? We're good. See you next month. See you next quarter. That's one approach you could take with ALCO.

But what we did at Bangor was we took a much more big picture, forward-looking, strategic approach,  and I used to say, you know, we were playing offense and not defense with ALCO, and so it wasn't just about what's the risks, what does the report say we have or don't have in terms of risk exposures, but based on what those reports were telling us and having the right people around the table at those meetings, what do we want to do strategically as an institution?  And I used to look at ALCO in my role, as you know, basically bank Treasurer, as kind of my board of directors, and so I would go to them saying this is what we're seeing. Here's what we're thinking about, get feedback and then from that came the action plan that I was going to basically implement.  I think those are probably the three biggest lessons that I learned in my time there, and I use them all the time now when I'm talking with clients making sure that I can move them in that direction because I see the value.

[Vinny, 12:30]

Vinny here, those are all terrific lessons for our listeners and, obviously, Zach and I kind of live that every single day. I wanna’ thank you, obviously, for joining us, even more so for mentioning that you started your career in broadcasting, cause it is clear you are made for the microphone. So, you do a terrific job.  You’re kind of putting Zach and I to shame, but that aside, I feel like I don't want to glaze past the tremendous experience that you had a Bangor, but tell us a little bit about transitioning over and starting your own business, if you will, Nelson Capital Advisors, kind of how that works, how you got it up off the ground, who you're working with, what the typical profile of somebody you're working with looks like, and there's some more questions about, you know, some of your mentoring types of classes, which I  find are terrific. So, could you just give a little overview of kind of where you're at now?

[Chris Nelson, 13:14]

Sure.  I had gotten to a point where, I mean, I loved what I was doing. I had a great team, I loved my colleagues that I was working with at Bangor, and I really enjoyed it.  But one of the things that I had longed to do was to find ways to teach and train community bankers. I kind of stumbled into the whole teaching and training thing kind of by accident. I actually had attended an investment training program. This was back - probably in 2003. So, I was, this is right after I had just started working with the CFO, and it's starting to kind of build the process and realizing how, as much as I knew, how much I didn’t know.  And I really had this opportunity to attend this one-week program a colleague of mine told me about it, and I wasn't thrilled at first because I know a lot of these things. It's sometimes if you're dealing with certain types of these programs, there's sales pitches or things, but this was, a this was a separate third-party program.  It was awesome, I enjoyed it and this was how I met a gentleman by the name of Tim Koch. He was running this program. He was a professor of finance at the University of South Carolina.  At the same time, he was also the President of the Graduate School of Banking in Colorado, so he was kind of doing this dual role. But I enjoyed the program so much that I reached out o him afterwards and said, you know, if there's ever an opportunity I can pay this forward, I, you know, would welcome if I could help you in any way.

Fast forward a few years.  He reached out to me and said, hey, we had a guy that can't make it this year. Would you be interested in coming in and teaching some introductory level investments, and I said sure, I'll give it a go. And so that was my first taste of teaching and training, and I really enjoyed that and having a chance to talk with other community bankers and understand what they were trying to tackle and helping them have some breakthroughs was really rewarding to me.

And so back then, this was, you know, 2007 to that - right before the 2008 financial crisis, I sat there. It's like, you know, if I ever have that opportunity, I want to do something like that. I didn't know what it was going to be, so fast forward probably 3-4 years ago now.  I had decided that I wanted to try and kind of do my own thing.  I had, you know, wanted - it was a challenge I wanted to take on, and over that time I continued to teach and train in different programs. I became directly involved with the Graduate School of Banking at Colorado and so forth, and I decided it was time to make a change. So I went to my CFO and it was a newer CFO at the time, and I let him know that I was planning to step away from the bank and do this. I wanted to give them fair notice. It was the right thing in my role, this wasn't something you gave 30 or 90 days and it’s see you. And so, we talked it over. I wanted to make sure we had smooth succession, smooth transition. I said, you know what? I'm going to give you a year's notice.  And I said we're going to plan for a one-year transition period to try and work through, get everything in place. I'll be available. And we decided that my last day at the bank was going to be March 31st, 2020.  I did not have global pandemic on my bingo card when we made that decision in 2019. That was one of those moments - later It's like, man, if I could do it over, you know.  And so I had made the decision, and I wanted to do something a little different.  I had decided there was definitely going to be an investment advisory component and consulting component, but I wanted to do something different. I didn't want to just be an investment advisor. I wanted to incorporate this training and coaching into the into what I was doing, and so initially I did it all under one umbrella and then I bumped into this thing called the regulators (not that that's ever happened in the finance industry), who basically it was highly suggested to me (without suggesting) - I know some bankers out there will resonate with that -  that maybe I take the training and the coaching and kind of break that off into something separate, as in other business activity which meant they didn't have to oversee.  I didn't need any further convincing on that front. So basically, from that came two companies that I now manage.  First is Nelson Capital Advisors which is investment advisory and consulting services for community bankers. And then the second one is Bond Investment Mentor, and then Bond Investment Mentor is built to be a training, mentoring, and coaching firm, basically specifically aimed at community bankers. That's the one thing that I try and do, and what really makes it exciting Is that it allows me to kind of operate along a spectrum, depending on what the needs of the Community bankers are.  If they're talking with me, if they need pure investment advisory services, sure, that's something I can certainly help them with. I can help them directly manage their portfolio and device strategies and then so forth. If they just need someone to step in and provide one-on-one training or some form of training in some way or coaching, I can do that as well. Or I can do a combination which is really fun, which is where it's one of those, I’ll help you with the immediate needs. Now we're going to do some training and coaching and, eventually, we're going to transition, and the training wheels come off and, you know, effectively I work myself out of a job.  But I'm OK with that because I think that's sometimes what Community Bankers need.  They don’t need the long-term advisor around forever, they just need someone to kind of help them and guide them until they can, get up on their own 2 feet and have the skills that they need to be able to do things confidently.

[Vinny, 19:12]

Yeah, no, it's clear that you're a very good teacher. In fact, I spent some of the weekend listening to your podcast, which is under the same label as your one of your two business, the Bond investment mentor. I'm supposing it augments the education piece of it. I guess in that vein, they're extraordinarily well done. Recommend them for any of our listeners. I think back about to my time with George Darling. George was so good at distilling complex concepts into a way that really anybody could ascertain kind of what the gist of it was. There are people, I think, who are incredibly intelligent, who have a hard time doing that, but I think you do a really good job with it. And so, it got me thinking, what are the types of things that I think it would be valuable to our listeners today. But one of the things that I just want to ask you about, because there's some things I think are starting to percolate an issue. Could you talk a little bit about your thoughts or opinions on the role of like the total return sort of strategy for community banks. I'm not sure if that's something you're an advocate of and or maybe you are. Maybe you aren't. Just curious if you could kind of explain it to our listeners and if you believe it has a space or a role within the Community banking world.

[Chris, 20:23]

OK. Well, first of all, thank you for the kind words on the podcast. I appreciate that. I think in terms of the portfolio and, specifically, you mentioned - you asked about the total return. As a portfolio manager who came from outside the banking realm, that was something that I was raised on. I mean, total return is looking not just at the income, but it's looking at the value of the investments that you're holding. Now, for a pure, you know, I'll call it a retail investor, that's all about capital appreciation. But the way that I've always looked at it, in a bank investment portfolio, for example, is with total return it. To me, it's an indicator of the, as I said, the underlying value, that the cash flow streams that you're getting from your investments, the income that it's generating, is worth in today's market.  And so, I mean, it goes back to kind of that basic bond math situation. If you've got investments that are generating interest cash flows that are higher or more valuable than what the market can generate for similar investments today, then it's worth more, and therefore the value of the investment, it goes up. On the other hand, if the cash flows are worth less than what the market’s generating today, then that means that the value of that security is going to drop. We've certainly seen a lot of this in the last year with rates shooting to the moon, and you know, all of a sudden fixed income securities are underwater. And I know there were a lot of conversations with bankers out there that they did something wrong or that they were bad investments and things like that, and I know I had several conversations with bankers and with bank boards, you know, just helping them to understand that it wasn't a bad decision. The fact that they're underwater, it's just it's telling you that where the market is today versus where we were two, three years ago has changed and the value of those is down. But if you think back to decisions that were made in investments 2020-2021, early 22, you know, that's the situation where under those circumstances, what were your, what were your alternates? I mean, you could let it sit at the Fed at 10 or 15 basis points. Nobody was going to do that. Loan demand wasn't really happening to speak of unless they had the letters PPP attached to them back in at least 2020 or they or somebody was reifying a mortgage. That was the other loan activity everybody was focusing on. So, what do you do? Well, you put it in the best place you can with what you know at the time. And so that to me is where total return - I'm not an advocate of, you know, saying you have to use total return as a cornerstone of what you're doing. I do think the total return has a role in helping a bank portfolio or a credit portfolio, a credit union portfolio manager, really understand the value that they're trying to bring into the portfolio, and it's and really, to me, total return forces you to think not just in the moment, which is really easy to do when you're managing a bank portfolio, but it forces you to think a little bit in terms of the future and in terms of how things could change and kind of help balance out the present versus the future so you don't end up with what I refer to as a portfolio of unintended consequences.

[Vinny, 24.01]

Gotcha. No, that that's a terrific description. I guess to your point, maybe this is a perfect segue if we're thinking about managing the balance sheet or the investment portfolio specifically in the future. Is it, you know, your perspectives, if you will, on sort of the loss trade, this is something that comes up virtually at every single ALCO meeting these days. You know whether you kind of divest yourself of those legacy investments that we put on at a time when there were no alternatives and we took the Fed at its word for transient inflation, etcetera. And I know there's no one-size-fits-all. I'm just curious what your reactions to those types of trades are. You've got some banks doing them, others not, for a number of different reasons. But just curious what - kind of how you would react to the loss trade.

[Chris Nelson 25.20]

I mean it's a - you're right. It's a conversation that a lot of institutions are having right now. And I get it, I mean with what we've come through and with these big negative numbers staring at you, staring you in the face, I mean it's not fun. It's painful for sure. And I know it's, you know, the source of a lot of angst for a lot of community bankers, but I think this is one of those things. The loss trade is one of those things that I always ask, why are we doing it? Because if the only reason you're doing it is to make the pain stop or it's that desire to just, I gotta’ fix this problem, it probably bears having some further conversation. I was actually talking with a client earlier today about such a situation that they were thinking about it because a board member had brought it up, and he they had, this person actually took it to the extreme. Well, why don't we just flush the whole thing out and we can get better yields, and we can kind of move forward. And my approach in talking with them was first of all, as soon as you pull the trigger on a sail you have taken something that's on paper and you've turned it into a direct hit to capital at that point. And so, the first question I always ask going back to what we talked about earlier about capital, is this the best use of capital in that moment. And that, to me, is a really important question because again, that's a finite resource and you know it's the crown jewels. How I used to, when I was teaching at business at the university Business School, I used to talk about capital as the Crown Jewels. You wanted to be really careful when you utilize this and so, if it's the best choice or it's among the best choices, OK, then it's worth having further discussion. But if not, if your institution has other things that are being planned, or other decisions or other risks that might have an impact on capital levels, I think that's something that has to be considered. It needs to be considered as part of a bigger picture. But it's that. And then the second thing is, I always say, OK, you're gonna’, you're gonna’ invest in this capital, because that's what you're doing. If you take the loss, you've chosen to deploy capital; you're investing in this loss. How? What's my return on my capital investment at that point and today, I mean, even if you can get a huge spread on an investment, it's still going to take you years in most cases to earn that back. And so, again, I go back to is that the best use of capital? Now for some institutions, you're right. As you said earlier, Vin.  It’s quite possible that it is a good choice. Now would I recommend flushing the entire portfolio? That's probably a big hit to earnings and to capital - wouldn't necessarily recommend that. Peeling some away, it might be worthwhile, but it's going to depend on the circumstances. You know, if you're an institution that you're not doing a lot of growth, you're not making any, you know, you have no upcoming plans in terms of M&A activity, for example, or things like that, if you feel that this is the best path available, OK, it's worth a conversation. I'm not a table pounder on it, though. I don't think so.

[Zach, 28.10]

Yeah, Chris, that's a fantastic answer in in framework, I think to go through and that earned back or the break even comes up a lot. I think a lot of people missed sometimes that, depending on how short that is, you might be very dramatically altering your risk profile also to get there. So, I think flushing out that conversation like you said. And so, I really appreciate that answer. I know the listeners do, too, or will too, and with Vince’s last two questions, there was kind of an opportunity cost theme. I think when you're talking about lost trades or OCI or just some of the choices that were made that may impact the total returns. So, I'm wondering today going forward through every cycle you can look back a couple of years before and there's always going to be armchair Monday morning quarterbacks. You get folks now who are looking at private label securities CLOs or maybe it's HECA, maybe it's something that they aren't used to, and I'm not saying that's bad. There's very there's very good reasons why you might wanna’ be investing in some of those. But for groups that you know, we're treasury and agency folks and now they bring up a CLO to you. Or, you know, they never bought a Muni in their life, and now they're talking about Munis or corporates. How do you handle those conversations? Or maybe take a step back. Are you seeing those? I know we are. And what are your thoughts there about what folks are going to be worried about maybe down the road or our armchair quarterback and you know in this time.

Chris Nelson, 29.29]

Oh, absolutely. I mean we're, I'm having those conversations periodically with clients and with bankers that I'm just talking with and, you know, I think part of it is everybody's looking to try and do what they feel is the best thing for a lot of times. It's just the portfolio, and this is where unfortunately a lot of bankers get caught because they get into kind of this what I'll call this tunnel vision. They're focusing on whatever the challenge of the moment is. It's kind of what I refer to sometimes when I'm training as rearview mirror management and is a case where something happens and so we're going to react to that. We're going to develop a response and then everything's fixed without thinking about what you've done in the process, maybe to introduce new risks or you've done something. The other thing that I think is important is you've done something where you have stepped outside. You know, we officially call it the risk appetite. I call it the comfort zone. An institution does something that well, we haven't done this before, but we really need to get yield because that's our tunnel vision. We're focusing on yield or we're trying to get that bigger payback on a lost trade replacement strategy. And so, they jump into something, and they don't think about the risks that are involved. Now in not only what you had happening on your balance sheet, but what this new strategy, this new investment brings to the table. And the thing you've got to remember is if you've got an investment that has a super great looking return on yield, you've got to ask yourself what risks are you taking on because you're not getting paid, the bond market's not a charitable organization. You're getting paid for the risks that you're taking on. And so, if I see an investment, it's like that's a great yield. OK, what's happening here? You mentioned, you know, CLOs, and I had a banker I talked with about those. And you're right, they can be appropriate in the right circumstances. But what this banker didn't realize completely, and we had a little bit of a conversation about it was the fact that they are a liquid, they're private placement. He was thinking about utilizing wholesale funding in a leverage strategy to purchase these. So, he was sacrificing liquidity in that moment because he, you know, we couldn't pledge him back at that point. They were private labels CLOs.  He couldn't pledge them and hadn't totally thought through the credit risk parameters of these investments and was prepared to make a sizable investment in these because they had a great yield and, more importantly, he didn't understand the collateral that was making up these particular investments. And so, once we kind of went through all of it and he kind of went into it with both eyes open, all of a sudden, there was a much different outcome for him in terms of the process. I think it's so important to be always thinking ahead when you're looking at investments because it's really easy to make a decision based on what you're seeing today, what your balance sheet needs today, what the broker is showing you today, and I think it's important to think ahead and I often, when I'm teaching, I talk about being able to answer the four questions. When you're doing something, I say it's important for the investment portfolio. But I mean, I use them all the time. I mean, question one is what are we doing? That's a pretty straightforward question. Two is why are we doing it and really thinking through what the answer to that is, and a lot of bankers generally get those two questions nailed down. Question three is the one that I think is most important and that's, how can this go wrong. And to me, it's sitting there and being aware today and self-identifying what are the risks associated with whatever we're about to do. If we're about to do private label CLO's, if we're about to do municipal bonds, we're going to do, you know, mortgage-backed securities, whatever it is, how can these go wrong? They all have some form of risk. So, what is it? And that brings you to question #4, which is, well, what will we do if it does go wrong? What's your contingency? How are you going to manage this process? I found that I use these questions, I’ll share this. Not only did I use them when I was developing investment strategies, talking with my ALCO, I used it with my regulators, and it was amazing when you'd have a question, you know, they'd ask a question, and you use that framework to answer them. Basically, you're telling them here's what we're doing, here's why, the rationale involved, we've already self-identified, the risk factors involved, and here's our contingencies if that ever comes to fruition. Man, those conversations went very, very smoothly.

[Zach, 33:10]

That's a tremendous way to frame it. Yeah, absolutely.

[Chris Nelson, 34:14]

It's so important to be thinking ahead, and as I said, it's not just about what you have today, it's what are you introducing when you bring this new thing into the mix because it's going to change the balance sheet. Is it going to change the portfolio? How?

[Zach, 35:03]

It's so smart and I think, too, for the folks listening in, you know, none of what we talked about necessarily is bad, right? These are just maybe new things that to your point, Chris, I think those four questions, if we can ask those for everything that comes up or gets proposed to you, you're gonna’ be in a lot better spot making decisions, right? If you think through those four things.

[Vinny, 35:51]

Well, it's interesting because every Monday morning our consulting team gets together, and it seems like when stuff is put on the table, we skip right ahead to Question 3. How can it go wrong? It's how we're wired, but I got one last hard hitting question for you. You’ve been so kind with your time. I saw that, you know, you said earlier on you said, what the heck? I'm moving from the beautiful Cape up to Bangor. Been happily married for over 30 years. And I think I figured out the secret because it says that you enjoy cooking, so you must prepare the meals. That must be the recipe for a great marriage. So, what is your specialty? Tell me more about that.

[Chris Nelson, 36.07]

Quite honestly Vin, I have to confess, as much as I enjoy cooking. I don't do it as often as I'd like. More importantly, I don't do it as often as my wife would like, but I you know, I don't have a favorite, per say. I just love the, actually it's again, it sounds strange. It's the portfolio manager in me. It's going into the kitchen. It's having a bunch of ingredients. It's like, what do I feel like trying today? Let's build something and let's try this and I'm always willing to kind of experiment a little bit, whether it be with some new main dish or a side dish or let's try roasting this or preparing it this way. Changing up the spice mix a little bit I’m always trying new things that way. Again, it doesn't always work out well. I've had a few things blow up in my face, but it's, to me it's less about having - I don't actually have a favorite recipe. To me it's just the process - love the process, and I usually make a heck of a mess. Do it in the process, which is the downside. The cleanup is not my favorite part for sure, so but no, it's something I love to do it just it kind of just gives me a break away from some of the other stuff I'm always, I'm always thinking, even when I'm away from my desk, it's like, oh, what about this? What about this? And I try to get away from that and find things that kind of change it up a little bit so.

[Zach, 36:19]

Terrific. Chris, thanks again so much for your time and the listeners, if you like with you hear, “Bond Investment Mentor” is Chris's podcast. It's great. A lot of great topics in there and some good education pieces as well. So please, we recommend you listen in if you like to listen to podcasts.

[Chris Nelson, 36:35]

Thanks. Thanks so much, and I appreciate your time, and I appreciate the opportunity to catch up with you, Zach and Vince.

[Vinnie, 36:42]

Thanks so much, Chris.

[Vinnie, 36:46] 

Well, welcome back, Zach. That was a terrific discussion. I mean, we could have went all day with him. We just checked the clock, and it seemed like, you know, 5 minutes went by, but yet there was a really wide-ranging conversation for about 40 minutes. I'll tell you very quickly he had a couple of key lessons from his days at Bangor, and they really resonated with me. I guess that's because this is part of our daily life, and it was the importance of managing capital and liquidity simultaneously within your organization. I think he said that; specifically, he says when you have strong liquidity and good liquidity options, and strong capital, it gives you options and that's absolutely true. We're seeing that today. As capital ratios have shrunk, as earnings haven't really done what you think and liquidity has dried up for many in the industry, the balance of those two, it really does give you a lot of options and many times, when you're contemplating balance sheet decisions, if you have both, there might not be a bad decision. So, I thought that was really important and I thought a pretty neat lesson that resonates to this day, which is years since he learned those.

[Zach, 37:53]

Absolutely. And I think he had another beautiful line in there when he said that the bond market was not a charitable organization. That may be the title for this one.  But it's so true, right? Some folks say there's no free lunch, or however you want to kind of frame it, but within that, I think he had four questions that he likes to ask, and I think it aligns pretty well with what we think too, right? On this front, whenever you're doing a strategy or if it's just on the bond side, the investment side, he said, you know, what are we doing? Let's spell it out. Let's figure that out. Why are we doing it? Which is pretty important, too. I think sometimes folks don't have that answer.  And how can this go wrong? That, to me, is the most important piece, right? How does this blow up, how do we get hurt? And then if that does happen, what are our cards? What are the contingency plans? So, I think that was if you take one thing away, I mean, I think you had a great take away. This to me was another great one for anyone listening in the banking space to be able to bring back.

[Vinny, 38:50]

Yeah, it's just some terrific, all-around advice from Chris and him sharing the benefit of his years of experience with the industry. I think this was a great conversation. A lot of takeaways for our listeners. So, we thank you for stopping by and listening to On the Balance Sheet and hope you'll join us next time.

[Dana Bernier, 39:10]

On The Balance Sheet is a podcast produced by Darling Consulting Group, DCG. All views and opinions expressed by the 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 and may have changed based on current market and other conditions. For more information about DCG, please visit www.darlandconsulting.com or e-mail us at info@dollarconsulting.com.

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