Wednesday, August 5, 2020

Managing Commercial Loan Risk in a Pandemic

Addressing Commercial Real Estate Exposure

Last issue, I talked about the importance of fully engaging in a digital delivery channel strategy for your bank.  Identifying gaps, making additional investments, and training employees to assist customers as they make the move to more digital services.  Here’s a link to that article if you missed it: 

This time, I’m going to deviate from my normal focus on the strategic application of technology, and talk to you about potential asset quality issues related to the COVID-19 situation.

Last August, Barron’s commented on the trend toward smaller banks holding more and more of the commercial real estate (CRE) loans in our country. By their account, banks under 20 billion in assets held over half of the CRE loans in this country.  In 2008 through 2010, as the economy began to cool, we saw regulators encourage banks to reserve against loans that were currently performing, because they feared changes in performance as things got worse.  So that we learn from history, I want to point out the potential for similar treatment in coming months and years, based on the impacts on various segments.

The fallout from our country’s reaction to the pandemic have been felt in many sectors.  Some of these sectors may return to “normal” once the virus threat is neutralized, but I suspect that many will not.  Two or three segments come to mind: 

First, office space.  Working from home has been a thing for many years, in selected cases.  Still, many companies held back on full implementation of work from home, for a number of reasons, ranging from technology to management styles. The COVID quarantine has forced the hand of many businesses, and investment in the necessary technologies has created an efficient, workable remote employee situation.  No doubt many companies are rethinking their need for office space.  Those who have invested in buildings will have a longer path to reducing these overhead costs, but those who are leasing space will no doubt begin to investigate ways to shrink their requirements.  In addition, remaining spaces will likely change radically, as they morph into shared offices and areas designed to facilitate in-person meetings or other small group gatherings. The office of the future will be smaller, both individually and corporately.

Walk-in retail is also a concern.  Ordering on line for home delivery, buying online and picking up curbside at the store, and even local delivery options have impacted businesses from hardware stores to grocery to department stores.

We’ve seen a wide variety of responses from the restaurant sector.  Some are thriving, others struggling, a few have closed, probably permanently.  In talking to these customers, you will want to see that they have made efforts to improve and modernize their order taking and delivery infrastructure while striving to maintain an adequate volume of business.  

What Can You Do Now?

Identify current commercial real estate credits with exposure to potentially challenging business types.  Discuss these in detail and try to get a feel for the ones you are concerned about, prioritizing by size of credit, and of course by any that may already be struggling to perform.  

Meet with loan customers to discuss their perception of the exposure, understand lease/rental terms and timing, and generally open a line of discussion to help you evaluate latent exposure.  For retailers and restaurants, you will also want to ask about occupancy, but also about their efforts to make it easier for customers to choose curbside or home delivery, order online, and generally do business in a more convenient, low contact environment.  This may include deals with third party personal shopper and delivery services.  Bottom line is that you need to know they have a plan for the future.

Document your work as evidence to regulators, your board and your auditors that you are attempting to stay ahead of any potential issues.  In some cases, based on the results of your work, consider adjustments to loan loss reserves in anticipation of significant changes in currently performing loans.

Tuesday, August 4, 2020

Director Education in a Quarantine

During the stay at home phase of the quarantine, many of you have successfully introduced video conferencing or conference calls for your board meetings.   I want to leverage your success in that area by offering timely, quick-hitting director education programs that give your directors updated information in a format that can be customized to your needs.  Rather than recording a generic session, I want to offer some key topics with a twist: customization to your needs via a conversation with you prior to the meeting, allowing me to incorporate elements of your strategic goals into my presentation.  

Attending live during your board meeting also allows me to answer questions and otherwise follow up my comments with key insights. 

Such a presentation can be done in 30-45 minutes, providing timely, fast paced information to your directors as they seek to lead your bank forward.

Here are some topics that you will want to take advantage of:

Ø  Integrating Technology with Your Enterprise Strategy

Ø  Managing a Remote Work Force for the Long Term

Ø  CyberSecurity Takes a Seat in the Boardroom

Ø  Leveraging your Digital Platform: Embracing your Virtual Bank

Ø  Preparing for the Branch of the Future

Ø  A Vision for Your Bank: Key Components of your Next Strategic Plan

Ø  Managing Your Core Vendor Relationship: What the Board Needs to Know

Ø  Custom Topics on Demand

Finally, I remain available to meet with your board face to face for such presentations, and of course to conduct full scope enterprise strategic planning when you are ready. 

Contact me to discuss your needs.  I look forward to the opportunity to be of service.

Trent Fleming

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Monday, July 20, 2020

Trent Fleming Quoted in Core Conversion Article from American Banker /CUJ

Core conversions go virtual amid pandemic | Credit Union Journal
Core conversions go virtual amid pandemic
By Jackie Stewart
July 14, 2020, 5:00 a.m. EDT
The coronavirus has accelerated the transition to virtual core conversions at credit unions and banks, moving a process that has long been done in-person to an online platform.

A number of credit unions forged ahead with plans to switch technology vendors even after the coronavirus became widespread earlier this year. Now that financial firms and their technology providers have seen this work can be done remotely, it could be the start of changes that continue long after the outbreak has subsided.

The pandemic “certainly provided a strong impetus” for the move to virtual core conversions, said Trent Fleming of Trent Fleming Consulting. “Prior to this year, it was largely a matter of vendor philosophy, with some preferring remote work and others preferring in person training. I believe COVID will permanently shift the focus to remote work.”

In an attempt to keep employees safe and slow the spread of the virus, the majority of financial services firms moved to employees working virtually once the coronavirus hit. Forty percent of financial services companies implemented an optional work-from-home policy while 58% made this mandatory, according to a recent study from Arizent.

Along with that, much business travel has been canceled due to the pandemic. The Global Business Travel Association, a business travel trade organization, surveyed its members earlier this year, and found that half of the respondents said that all domestic trips had been canceled. Forty-two percent said most had been called off, according to a survey, which was released in April.

The pandemic has also shut down nearly the entire credit union conference circuit for the year, which doubles as a high-profile showcase for a variety of vendors in the industry.

Technology vendors normally send personnel to a credit union for different on-site activities, including training for staff members prior to a conversion and then again when the actual switch happens. Having someone physically on site can be comforting for the institution changing to a new system, sources said. The vendor’s employees can quickly answer a question or review a report if they are there in person and a problem arises.

But the coronavirus upended normal procedures, and now credit unions and their vendors have moved to completing these transitions virtually.
page2image24479616 page2image24480192 page2image24480384page2image26603504 2/13
7/14/2020 Core conversions go virtual amid pandemic | Credit Union Journal

Symitar, a unit of Jack Henry that provides technology solutions to credit unions, usually sends between six to 12 employees to assist a credit union with a conversion, said Shanon McLachlan, president of Symitar.

The company has done roughly 60 “conversion-related events” — there are multiple steps in switching to a new system — since the beginning of March, McLachlan said. All of these were done virtually since Jack Henry began restricting travel to only essential trips in mid-March. Additionally, about 96% of its employees are working remotely right now, up from its normal 30%.

Prior to the pandemic, Symitar was working to allow credit unions to convert systems virtually but there wasn’t much demand for that, McLachlan said. Still, vendors are now better able to do this work and related training remotely than even a decade ago because of teleconferencing capabilities so credit union employees have the benefit of interacting with Symitar’s staff over video.

“You get that face-to-face via these tools and you can start building those relationships,” McLachlan said.
SAFE Federal Credit Union in Sumter, S.C., initially started contemplating switching core vendors in 2012 and after a search ended up signing a contract for another six years with Fiserv in 2014.

Knowing that the contract expired in May and that changing vendors can be a long process, the $1.2 billion-asset SAFE began its due diligence to find a new vendor in April 2018. This included on-site demonstrations and sending a team of employees to visit other credit unions in Texas, Michigan and Pennsylvania.

The management team made a recommendation to the board in February 2019 to switch to Symitar and then went through four months of contract negotiations. During that time, SAFE and Jack Henry were already discussing the conversion.
Given how long the process took, SAFE’s management team was reluctant to delay the conversion once the pandemic hit. It could be months before the credit union would be able to settle on another date so the management team decided to forge ahead, even if the conversion happened with only virtual help.

“Once you set a date with all of these vendors, changing that date is very difficult,” said Michael Baker, president and CEO of SAFE, who noted that the last time the credit union went through a core conversion was in 1989 and a hurricane struck that weekend.

However, SAFE did make some changes in the wake of the pandemic. For instance, it held nearly twice as many internal training sessions for the new system to ensure employees could appropriately socially distance during the process.
SAFE went live with Symitar in mid-May after converting its mobile and online platforms with a different vendor in January. To help with the process, SAFE had a “virtual war room” set up with a conference call bridge open the entire time so employees could quickly get questions answered by Symitar.

“Instead of walking into a board room, you were picking up a phone and dialing into the virtual conference room and talking to whatever resource you needed,” said Kevin Thomas, chief information officer at SAFE."

Going forward, Jack Henry is likely to give its clients a choice regarding getting help in-person versus virtually, McLachlan said. He expects many may choose a hybrid option where some aspects of the core conversion remain virtual, such as training for employees, while personnel would be on site when the actual switch happens.

“A lot of the steps can be done over the phone or email,” Fleming said. “In most cases, they are sending personnel on site to hold hands and it probably lengthens the process. If I’m going to be in your institution for a week, there is a level of camaraderie involved. I will go to lunch with you. ... I think we will see more virtual conversion activity, even when things get back to normal."

Jackie Stewart Managing Editor, Credit Union Journal

Tuesday, June 2, 2020

Back to Normal? Thoughts on Digital Platforms

During the spring, I’ve been publishing my newsletter much more frequently than normal, in order to provide you with some ideas and guidance during the quarantine period.  Depending on the situation in your region of the company, you are likely in various stages of reopening, and I think we’ve covered that in good detail so far.    I’m available if you want to talk about specific situations.

This issue, however, will be a bit more “normal” to help you begin addressing your digital strategy in more detail.  I’m focused on two things: 
1) embrace and reinforce customer behavior that has changed. Because your lobbies have been closed, at least some of your customers have begun using your digital channels more consistently.  We want to preserve that behavior, and benefit from it.  Remember, anytime a customer uses self-service, they are happier, and you save money versus an in-person visit or a phone call.

2) Apply lessons learned to be better prepared for future events that might also result in temporary reductions of service and identify gaps in the services you offer now in order to provide a more attractive and complete digital offering.

Here are the key digital platform tools that I feel you must have:

Online account opening - a lot of the reaction I get here is either driven by compliance concerns (we can’t legally do this) or by misconceptions about control over applications.  My main focus with on-line account opening is to allow your existing customers to easily do more business with you.  If you choose to open it up to new customers, you will find that most vendors can easily help you limit the area (zip codes, counties, states) that you will even accept applications from.  As to compliance, there are plenty of good ways to address KYC, Patriot Act, and funding questions to ensure that you are legal.  Hundreds of thousands of new bank and brokerage accounts are opened on-line each year.  You can do it too.

Online loan applications (as a start, later you should consider approvals and funding for certain simple loans) Customer expectations are high in this area, fueled by offers of “30 second decisions” on credit cards.  In order to remain competitive with both consumer and small business lending opportunities, some level of automation is needed.

Esign technology for any and all customer documents.  Here again, the industry may have passed you by.  Customers are used to such technology on insurance documents, mortgages, and many other financially focused matters. Time to catch up.

Remote deposit, both mobile and desktop

Contactless Payments
    a. Cards
    b. Smart Wallets

Once a customer has successfully used a technology for the first time, you are well on your way to converting them to a primarily digital user.

A key to success in driving customer use of your digital platform is employee use of those same platforms.   Employees should be “endorsing users” of the technology: confident and enthusiastic.  For example, if a customer approaches a teller to make a check deposit with a smart phone in their hand, we would expect that teller to engage the customer in a discussion of how quick and easy mobile deposit is - along with a personal story.  

You also need your employees to use all available payment services in your community, as a way of identifying and improving the merchant experience.  Offering Apple Pay, Google Pay, or contactless debit card technology is meaningless if local merchants aren’t set up for it - or clerks aren’t trained in how to use it.  You’ve no doubt experienced a situation where you’ve tried to use Apple Pay, and have been told by a clerk “oh, that never works” or “I don’t know how you do that.”  Contactless payments are especially important with all the fears for contact transmission of disease - and I really had a disappointing experience of trying to use such a method and finding it didn’t work at that particular register, complete with the clerk announcing that my card was declined!  I put away my smart phone, inserted my chip card, (the same card tied to Apple Pay) and completed the transaction.  As a consumer, what is my incentive to keep trying in these situations?

Sending your employees into the community with the mission of using new bank payment capabilities will help pave the way for your customers to use them without incident.  While the above described scenario was not embarrassing to me, it understandably would be to your average consumer.

Basically, you have two tasks here.  First, get to work to ensure that you have no gaps in your digital offerings, and second, take this opportunity to capitalize on the increased use by customers and solidify their use of digital channels.  Your costs will go down, and customer satisfaction will go up!

As always, let me know how I can help you achieve these goals.

About Trent Fleming
I’ve had a number of new subscribers in recent weeks as a result of my regular COVID-19 updates, so I thought I’d take a minute to let you know more about me.  For more than 35 years, I have helped community banks make good decisions about technology, strategy, and management.  I speak extensively at state banking association events and teach at graduate banking schools at Penn State and Wisconsin.  My consulting work includes significant experience with core vendor evaluation, selection, and negotiations, as well as strategic planning and director education, and of course, “other duties as assigned.”  More information at 

Upcoming Speaking Engagements

June 2 - Mississippi Bankers Web Conference “Integrating Technology into your Enterprise Strategy”

June 3 - Mississippi Bankers Web Conference “Managing a Distributed Workforce”

June 11 - Western Bankers Web Conference 
                > Integrating Technology into your Enterprise Strategy
                > Managing your Core Vendor Relationship

Please call, text, or email if I can help you in any way.

Trent Fleming

Wednesday, April 29, 2020

Thoughts on Reopening and Lessons Learned

Here’s my latest thinking on the COVID-19 situation.  I’ve been considering two particular issues and wanted to share some thoughts with you on each.

First - what will it look like to “reopen”? Most of you have closed your branches for walk in traffic, sending all teller activity to the drive-thru, and meeting in person only with those customers who need that level of attention during this time.  Some of you have also entirely closed selected branches.  

 I applaud those of you who offered innovative solutions like curbside pickup and drop off of documents and transactions.  Depending on the exact situation in your part of the world, you may stay in this operating environment for several more weeks, or you may be considering following your state’s guidelines to begin re-opening your lobbies sooner.

So let’s talk about what re-opening looks like.  Before you announce that your lobbies are again open, consider what you can do to ensure employee and customer safety.  Certainly, limiting lobby traffic will be a part of that.  While there are varied levels of what “open” means, virtually all of them include maintaining “social distancing” and limiting crowds to 10 people or less.  You will need some employee training on how to man the door and effectively control crowds.  

You’ll also want to consider what measures you can and should take to keep everyone safe.  As a PR move, you may want to take the temperature of each employee when they arrive to work.  Make that widely known, and ask anyone who registers a temperature, or otherwise doesn’t feel well, to stay at home.  That’s just good advice, any time.  But let’s make a practice out of it.  Now, the issue of masks.  I’m pretty firm about this: either every employee wears a mask or no one does.  The risk of having selected employees with masks is that someone interprets that they are sick.  

Can you take the temperature of customers before you let them in a facility?  This is more difficult.  Disney says they plan to do that when they reopen their parks.  Our children’s summer camp has been doing this for several years.  Again, kind of a common sense thing but not everyone will see it that way.  You’ll have to consider the number of cases in your area, and overall public sentiment, to decide what to do.

Regardless of these measures, continue maintaining a clean environment. Access to cleaning wipes, hand sanitizer, and gloves will continue to be important for the foreseeable future.  Ask your janitorial company about enhanced cleaning measures, including fogging, that they provide, and make sure you publicize these measures to let customers and employees know how serious you are about their safety.  

Finally, a word about branch opening.  If you closed selected branches, what were the key decision factors?  Are those long term issues and if so, can you get along without that branch going forward?  Such events are a good time to consider those matters.

Second,  I want to talk about what we are learning from distributed work.  There are important lessons here that can make you a more productive and profitable organization over the long run.  Put together a small team to start capturing pros and cons of the current environment.  Think about what has worked well, and what has not.  There are certainly challenges to address, ranging from the quality of Internet access employees have, to the strength and resiliency of your network in supporting remote workers.  Some tasks can easily be done at home, while others require office presence, and those have to be clearly identified.

Many banks find themselves outgrowing office space.  If you find that selected employees work as well - or better - from home, this is one way to address that problem.  You employee a wide range of individuals.  Some require close supervision, others do not.  Effective management will assess employee skills and abilities, and assign duties accordingly.  In addition, it must be said that you should be evaluating your overall work force requirements.  It may be that you simply have too many employees. Situations like the one we are in will often make that more visible to you.  Your ability to grow without a corresponding increase in head count is critical to your long term success.

What are you learning about effective meetings? Have your virtual meetings been shorter or longer than normal,  and more or less decisive? Has the use of video enhanced or hindered your meetings? Again, don’t make this just about crisis situations - consider what you have learned that may be applied to the long term.

Just a few thoughts.  Remember to keep an eye out for fraud,  work to ensure that employees are properly trained and educated for any operational changes you implement, and remember to communicate well to employees, customers, and the media.

Call, email, or text if I can help in any way.

Trent Fleming

Thursday, April 9, 2020

Preparing for Cash Hoarding

I’ve purposely waited an extra week to send an update.  I know that many of you are involved with SBA lending and other matters. But I thought it was time to revisit and expand on my comments about about cash and the possibility for a run on an institution or across the industry.  

First, it is important to note that there is not a shortage of cash.  However, we’ve already seen irrational hoarding of other things, which seems to be continuing.   In particular, consider how fast via social media both right and wrong information can travel.  So let’s start with the basics:  

First, as I said recently to you, don’t let your ATMs run out of cash.  It may see like only an operational issue, but I guarantee you it will create a PR problem for you and perhaps your competitors.

Second, take time to do some employee training and education about the matter.  Employees need to realize that offhanded or joking remarks about running out of cash are never appropriate.  Especially now.  For example, a teller who says “I’m out of 20s” means that he or she needs to buy some from the vault, not that the bank physically doesn’t have any 20s.  But customers don’t know this.  Further, while the public doesn’t understand our fractional reserve system, your employees should understand and appreciate it, and know that we do not have 1 to 1 cash on hand for all demand deposit accounts.  As with ALL PR situations, employees should be reminded that (unless they are the corporate spokesperson) that they should not casually or officially attempt to speak on behalf of the bank.  This includes their own social media accounts.  There’s just too much room for interpretation.

Third, especially now, be alert to fraud being perpetrated on your customers. Any requests for large withdrawals that seem unusual should be gently investigated.  This will be a bit more challenging as it may be through the drive up, but you still need to be alert to unusual activity.  Perhaps you will intervene in a fraud situation, or if the person feels the need to hoard cash, you can engage with them to alleviate their fears. For most people, the additional risk of large sums of cash on their person or in their homes is more of a liability than a benefit - risk of loss, theft, or destruction in the case of fire or storm damage. You know the drill, but don’t assume that customers do.

Fourth, talk openly with your staff about what a run looks like, and how to respond.  You will know something is wrong through customer activity (the drive in lanes are full, and around the building) or you are seeing posts on social media encouraging hoarding, etc.  Again, gently inquire about the requests for large sums.  SLOW DOWN.  Count and recount, slowly and purposefully.    Immediately begin limiting the dollar amount of cash withdrawals to ensure that all customers have access to reasonable sums.  Have a plan now for acquiring more cash if you see that you will need it.  Be prepared to support other local institutions if you can.  In today’s environment, again because of social media and rumors, this is likely to be a widespread event, not limited to a particular institution.

Finally, try to extrapolate short term and long term education points from this particular component of today’s environment.  Nothing you do here will be wasted when the current situation is resolved, so take the time to document your efforts, and update your policies, procedures, training and employee manuals to reflect best practices.

My best to you and your staff as you work to serve customers and maintain your business.

I’m here to help.  Call, text or email, day or night.  

Trent Fleming