Biting the Bullet on a Core Conversion

In the last two weeks, Community Trust Bank of Ruston, La., has fielded 18,750 calls, many of them anxious or irate. The bank has 48,000 customers.

The high call volume for a bank of its size was largely the result of a core systems conversion that took place the last weekend of July. The $3.8 billion-asset bank tried to get the word out to customers about the steps they needed to take to ensure a smooth transition, such as authenticating their accounts online before using the new mobile app. Community Trust sent out four letters, include one on June 1 from president and CEO Drake Mills, and a dozen or so email alerts. That wasn't enough, apparently.

"What letters? Anyone get one?" one customer wrote on the bank's Facebook page. Another respondent emphatically said she never got a letter.

Now, the bank has been busy trying to track negative comments on social media and looking for ways to turn the negative experiences into positive ones by helping customers get up and running on the new site and on their phones. "Our social media and marketing teams are trolling [the sites] constantly," Mills said.

"We just felt we did a very good job in preparing our customers — there were several letters talking about the conversion with specific instructions," he said. "In hindsight, maybe we didn't communicate the way we needed to."

But Mills may be a little too hard on himself. Core conversions are painful — which is a big part of why they're so rare.

"No matter how much the bank tries to prepare and plan for contingencies like these, things will inevitably go sideways and there will be unforeseen problems that the bank will need to address," said Jeffry Pilcher, publisher of The Financial Brand, a marketing website for financial institutions.

But Community Trust, unlike most banks, had a strong impetus to make a change. Its old system was outdated and the patches and middleware needed to make it functional were costly. Meanwhile, the bank has been expanding at a fast clip — its assets have doubled since the end of 2010 mostly through organic growth — and as a bank gets bigger so will its regulators' expectations about how it manages risk.

The conversion was two years in the making. The bank had been using the Kirchman Bankway system since 1986, following the merger of Bank of Bernice and Bank of Choudrant (which had combined assets of $38 million).

Mills said the company shopped around, but ultimately decided to stick with the same vendor, FIS, partly because of Community Trust's history with the firm. "Since 1986, we've been working with a group of people and they have supported us very well so it made sense to go from one FIS-managed solution to another as long as the product met our needs," Mills said. "But we did look at other systems."

The bank chose a more contemporary offering from FIS, the Integrated Banking Services system. Other core solutions were not as "tightly integrated with online banking" particularly with treasury management, Mills said.

The new system streamlines the process for getting customers enrolled in online banking, gives the bank the ability to provide electronic notices and statements on loan accounts, offers the ability to send financial files to treasury customers directly, consolidates mortgage loan servicing and enhances automated clearing house payment origination capabilities and reporting.

Over the years, the company has made small upgrades and bought ancillary third-party software to keep up with its asset growth and diversification into more commercial products.

"We ended up with a processing system that was somewhat of a Frankenstein project," Mills said.

The patchwork of systems and software was prone to human error. For instance, the bank has had to amend -- though not restate, an important distinction, Mills said -- a few of its call reports filed with Federal Deposit Insurance Corp. because of incorrect collateral codes. Ultimately, the previous system was inadequate and could have put the bank at risk of running afoul with compliance.

"Commercial loans are more technical and require a more sophisticated system," Mills said. "The system was not robust enough."

The cost of operating the old system was a major driver of the decision to convert. Mills said the privately held bank spent $8.6 million on processing last year. That's high, experts say. It is likely a driver of the bank's efficiency ratio: 67.86% at the end of the first quarter, about five percentage points higher than for banks nationwide with $1 billion to $10 billion in assets, according to data from the FDIC.

Not including the cost of the conversion, the bank expects the processing costs to drop by as much as half. Also, the new contract calls for FIS to charge the bank by accounts, rather than by assets. That should help control costs, too, Mills said.

The company also wanted a system that it could use should it decide to breach the $10 billion-asset threshold, where several new regulations kick in, including additional oversight and stress testing.

The bank's balance sheet is well below the threshold and it lacks a strong interest in M&A, but Mills said he wants to be prepared. His feelings are common among leaders of banks with more than about $3 billion in assets — essentially, they assume they will begin to be treated like a $10 billion-asset bank long before they reach that size.

Late last week, Mills said, much of the frenzy had calmed down. Most customers have figured out how to log in to the new system and update their mobile app.

The conversion of the commercial customers has been mostly smooth. Many of those customers were contacted directly leading up to the conversion, specifically the treasury management customers.

"We walked them through it because we knew we were going to convert during a payroll week," Mills said. "I think it was an opportunity to strengthen those relationships."

There have been hiccups, however. For instance, customers who commingled personal and small business accounts had some trouble. The company is testing to develop a patch for that and hopes to complete the testing on it soon. Otherwise it could mean migrating 600 customers into commercial accounts that are designed for much larger companies.

The company began preparing for the conversion in December and embarked on an extensive training program over the last three months, even to the detriment of the bank's loan growth, which slowed to 1.33% between the fourth quarter of 2014 and the first quarter of this year, compared to 3.05% between the third and fourth quarters of 2014. Most of that is had to do with redirection of employees' energies, but "we also spent so much of our resources on this conversion." (The pace of loan growth was back to nearly 3% between the first and second quarters of this year.)

Most community banks are working on systems like the one Community Trust previously had, said Stephen Greer, an analyst at Celent. While running on antiquated rails can be costly, most banks are reluctant to undertake the initial cost of making a switch. An improved earnings environment could lead more banks to look into upgrading, but Greer said a wave of core conversions has long been expected but hasn't panned out.

"A lot of banks have these sloppy but functional systems," Greer said. "Even if they had more cushion to spend, I'm not sure that this is the first thing they'd do. I think they'd go for the flashier things first, even if it is not what they should be doing."