Thinking Big by Focusing on the Small Things
First Midwest is a growing, $13+ billion bank, which means it recently had to deal with the many issues that crop up when a bank crosses the $10 billion asset level.
As the Illinois-based bank was approaching that important benchmark, Rich Padula, FMB’s Director of Finance, knew things were going to change.
Crossing the $10B threshold meant the scrutiny from federal regulators would ramp up considerably. Increased attention would be given to a host of bank decisions, including how FMB priced its commercial loans.
“As we moved to a more sophisticated credit scoring system [to prepare for the federal regulations],” Padula said, “the move to a more sophisticated pricing level, too, logically made sense.”
“Just one basis point on a 10-million-dollar portfolio is a lot of money.”
Compliance was just one of Padula’s motivations for improving FMB’s approach to pricing. He also wanted to increase the bank’s profitability on its commercial loans as a way to offset the increased costs of compliance at the $10B level. And he knew that, as the bank continued to grow in size, small improvements in pricing would have an even greater impact.
“Just one basis point on a 10-million-dollar portfolio is a lot of money,” Padula said.
Changing the Pricing Mentality
With those challenges laid out before him, Padula took a look at the home-grown Excel-based pricing solution First Midwest had and quickly determined it wouldn’t be up to the task.
“It had limited functionality,” he said. “There wasn’t that intelligence that can say, ‘Hey, if you adjust your pricing level here, you’d get closer to your hurdle rate.’ It wasn’t as user-friendly. It took a lot longer for the lenders to go through.”
Those limitations also helped foster a mentality among lenders that Padula was eager to change.
“For them, pricing was just about being able to say, ‘Hey does thing get me past my committee?’ versus providing tangible information to increase the profitability of the bank.”
That Extra Basis Point
“Look at how loans are priced in the industry,” Padula continued. “Why don’t we price it like gasoline? Why isn’t it LIBOR 201 or 199? Why is it always 200? Why aren’t we trying to get that extra basis point?
“Why do we make terms even? Five years; why don’t we go for 5.1, or 4.9? We just don’t think that way.”
But it wasn’t enough to make a philosophical argument and hope to change the bank’s thinking. Padula knew that a significant shift would only occur if his lenders had the tools to put theory into practice.
Educating and Empowering
Padula started his research and then began talking to colleagues in the banking industry. It soon became clear to him where he should turn.
“There really aren’t many other alternatives out there that are in the class of PrecisionLender,” he said. “I just haven’t seen anything that’s as robust or user-friendly on the front end and that provides that transparency to the users.”
That transparency has been particularly helpful to Padula in educating and empowering FMB’s lenders. Initially he got pushback along the lines of “Hey Rich, the pricing tool doesn’t price the loan, the market prices the loan.”
Padula has responded by acknowledging the power of the market, but then also by showing how PrecisionLender helps lenders find that critical room to maneuver, the space where they can not only win deals, but also increase profitability. Seemingly minor shifts in any number of deal terms – duration, collateral, deposits, risk ratings, initial fees, etc. – can often make all the difference.
“They say, ‘Gee, you’re right. I actually do have some control over the pricing.’”
That realization has turned initial skepticism into excitement.
“Before, they had a model that they used as something to complete a hurdle or get out of the way. Now they have a tool that can help them do their job.”
“Before, they had a model that they used as something to complete a hurdle or get out of the way. Now they have a tool that can help them do their job,” Padula said.
A Significant Difference
Crossing the $10B threshold wasn’t easy for First Midwest. Then again, few things are “easy” in commercial banking right now. Margins are tight and competition is fierce.
But there’s still room for innovative banks like First Midwest to grow. It’s just a matter of using tools like PrecisionLender to find those opportunities.
“There’s not one price,” Padula said. “There’s actually a band. And yes, it may be narrow, but our lenders can now operate within that band.
“And that narrow band makes a significant difference to the bottom line. Especially when you add it up across every lender in the company.”
Learn more about First Midwest Bank.
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