Finance blog


Shifting into High Gear

January 26, 2021

In late September, I posted a piece that discussed how the reality of finding new gears has changed the way we at Performance Trust advise bankers across the country. I quoted Charles Schulz who once famously said: "Life is like a ten-speed bicycle. Most of us have gears we never use." Since then, I have posted a variety of pieces on everything from regulations, to student loans, investment banking, and several other matters. We have been metaphorically shifting through all of the gears as we have raced uphill in this challenging marketplace. Today, I want to introduce you to Mike Kelly and David Ferguson. They head up a division that has been one of the great success stories of the past five years at Performance Trust: the Capital Markets Group. If you had asked me in 2015 what a capital markets product was, I would have given you some vague platitudes, but now I have some context. Let's revisit a graphic that I used in our piece on student loans. Notice that the "Other" piece is a huge portion of the asset-backed arena. As of this writing, it amounts to almost 235 billion and you can see it has been growing steadily. What is "Other?" For us, it means potential capital markets group products.

One of the truly great innovations in the United States has been the idea of securitizing all kinds of debt. This has been a transformative financial innovation that has changed the way financially sophisticated countries do business. Our Capital Markets Group was formed to allow us to enter this space with expertise and confidence. I'm really excited to present this overview of their capabilities, but before we jump into an interview format, let me introduce the team.

We were very fortunate when Mike Kelly joined us in 2012. His first big task was to help us open what has become our largest remote office in Greenwich, CT. This represented our shifting to an unused gear: our first foray into working with institutional clients. In 2016, Rich Berg asked Mike to team up with David Ferguson to lead our then-new Capital Markets Group, with the objective of expanding the range of investment opportunities we could provide to our clients. In working with a broad range of issuers who tend to be largely underserved by Wall Street, the team has focused on creating better risk/reward assets than are otherwise available. This team has become a leader in developing unique and first-time securitizations, and has become an active participant in seeking attractive loan trading opportunities.

Over his 28-year career, Mike has worked with some of the largest investors, including PIMCO, Freddie Mac, and BlackRock. In his active role in the new issue process with these investors, he accumulated experience in their capital markets and structuring activities.

Mike's partner David Ferguson joined Performance Trust in 2013, initially as an investment banking and ALM analyst, where he built a strong, fundamental understanding of the Performance Trust methodology and its application to the balance sheets of financial institutions. In 2014, he transitioned to the Trading Desk, where he concentrated on credit analysis, opportunities within new issue underwriting, and the trading of structured financial products.

This duo has provided incredible leadership over the last five years, and I feel really fortunate to have grabbed their attention for this interview. Their market space is complex, so there is no way we will be able to cover it in its entirety in this post. Therefore, I've kept my questions within the big picture.

(Kurt) At the end of 2020, your team hit the five-year mark for Capital Markets at Performance Trust. What have you accomplished, and what have been some of the key lessons you've learned along the way?

(Mike and David) There are two key areas of accomplishment that are highly linked to each other. First, we felt that the primary focus for our group must be thoroughly educational, to align with Performance Trust's longstanding culture. This included both internal and external education. We built this to mesh with the "Green Area of the Balance Sheet" discussion that Rich Berg and Phil Nussbaum were teaching in their courses around the country—namely, how this approach can help bankers make better decisions in the non-core, non-relationship parts of their businesses, critical for them to generate potentially higher NIM in a tougher industry environment. The second great accomplishment for us has been the collaboration with so many clients, who have locked arms with us in this effort. It took quite a bit of work and study on their parts to get their own teams ready and capable of evaluating and, when appropriate, investing in these assets.

That's been a good thing for them, it turns out. Our clients are operating in a new normal that is increasingly more challenging. Now, with extremely low rates, very little slope in the curve, massive amounts of excess liquidity, and fewer and fewer attractive opportunities in which to invest that liquidity, the challenges have never been clearer or pressing. Our mantra in helping them is we need to look where others can't or won't. Even with the common ground of our shared methodology already in place, a great deal of education and downright work on both sides was necessary to arrive at a level of understanding and frankly trust to enable these investors to go where they never had before. Initially, we could only help a few clients at a time take this step, but in 2020, just over 7 billion dollars' worth of decisions in this space were made by educated investors, often with forty or more participants in a single opportunity. Today, in collaboration with our clients, we have learned that in working together, our power can rival or surpass that of any of the Wall Street giants.

Today, in collaboration with our clients, we have learned that in working together, our power can rival or surpass that of any of the Wall Street giants.

You mention solving customer problems. We are certainly going through a unique period now. Are you seeing different challenges within the community financial institution world today, with the implications of the pandemic?

We touched on this briefly above, but in general, we would characterize the largest problem facing our community financial institutions right now is the massive supply/demand mismatch across fixed income and loan markets. The demand is at an all-time high. For a myriad of different reasons, certainly COVID-19, quarantine, and stimulus being among them, our clients have liquidity levels that seem to be at or near all-time highs. I don't think we, on the Capital Markets team, have spoken with a single client over the past two to three months who isn't sitting on far more cash than they know what to do with, and certainly far more than they "want" in an ideal world. At the same time, clearly in part because of those dynamics, the availability of appropriate risk/reward products is extremely limited. Furthermore, the incredible industry-wide decline in Net Interest Margin (NIM) has forced many financial institutions to examine alternative sources of income, crowding into our clients' space.

At the end of 2020, we realized that one of the biggest challenges and themes for 2021 is going to be access to product. In our own deals, in which we are bringing Green Area assets to our clients, we routinely see 100s of millions of dollars in interest from dozens of accounts as soon as we open the discussion. It is a real challenge for all of our clients to put their money to work in smart ways that will truly drive NIM and ROA while continuing to avoid untoward risk. But they and we must resist any temptation to capitulate, to allow ourselves to make suboptimal decisions in the interest of expediency.

At the end of 2020, we realized that one of the biggest challenges and themes for 2021 is going to be access to product.

What are you doing about that?

We are constantly seeking to solve problems with new and creative solutions. The idea is to find ways to solve the special problems an originator might be facing in a way that also is attractive to our educated investors. Real value arises when both have a difficult-to-solve issue. For investors, that is a relatively prudent product that can enhance their NIM, at the cost of educational effort. For issuers, that is often assistance in structuring or packaging their loans specifically to meet this class of educated investors' needs. From issuer to issuer and season to season, what will work for all parties can become a moving target.

Some of readers may be familiar with the PPLP structure that we have brought to the loan market. That's a great example of a creative solution that solves an originator's need to sell loans off his balance sheet while also bringing the asset to our clients in a way that makes it a much more interesting and potentially safer asset than pure raw loans would be. We're looking everywhere and talking to every originator we know (and meeting ones we don't yet know) seeking to discover the next all-win connection. It may be PPLP or it may be something completely different, but we're constantly working on what's next. We are also working on a creative solution to bring warehouse funding opportunities to our clients that we are extremely excited about; this would be a different angle on the same objective, finding all-win arrangements.

What are key initiatives or things we should look for in the future from your group?

To find high quality risk/reward assets in competitive markets, we always need to be exploring new areas relentlessly. As our clients know, our view is that the areas of greatest opportunity are those others can't—or won't—explore, due to whatever limitations of capability, scope, or imagination they may face. We will continue to use our own size, nimbleness, and creativity along with the collective power of our clients acting together, to seek out new areas of opportunity. These will certainly change from year-to-year, but you can be sure we will be out there working hard to find them.

I want to sincerely thank Mike and David for taking time out of their busy schedules to discuss this new gear with us. As I mentioned at the top, this is an incredibly complex topic that really can't be covered thoroughly in a blog post, so I asked them if it would be ok to include their e-mails for you to ask direct questions and thankfully, they agreed. They can be reached at and

Final, final thought: I stayed at a downtown hotel in Denver last week—it was an absolute ghost town. At 7:30a on a weekday, I got up and walked to a Starbucks—I was the only person on the street. So weird.

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