We Can't Price Like a Small Bank Anymore
When John Tull arrived at Union Bank & Trust in the summer of 2014, the $7B Virginia-based bank was in the midst of growth – and transformation – having recently completed the acquisition of the $3B bank, StellarOne. Tull, Union’s Treasurer and SVP of Strategic Finance, thought the time was right to make some waves in commercial loan pricing.
“The context I presented was, ‘Hey, we’re getting bigger. We can’t price like a small bank anymore.’”
“Exactly What This Bank Needs”
For Tull, changing the pricing culture required work on several fronts, including altering how Union factored in risk to its commercial deals.
“We weren’t dynamically pricing for risk,” he said. “We were overpricing better credit deals and underpricing poor credit deals … so, not surprisingly, it was impacting the deals we would win and lose.”
"We were overpricing better credit deals and underpricing poor credit deals…”
Tull felt the pricing tool Union was using at the time was part of the problem, so he started searching for alternatives.
“For me it was an opportunity,” he said. “To kind of take a fresh look.”
Before Tull could act on that opportunity, he had to rally support for spending money on a new pricing tool. Then, when he’d identified the best option for Union, Tull had to convince the bank that it was worth spending more for PrecisionLender, as opposed to a cheaper alternative.
He laid out his argument, pointing out that simply adding a few basis points on a portfolio – or winning a deal or two that might have previously been lost – would easily help Union recoup its investment.
“If we can’t do that with this product, I’ll pay the license fee out of my own pocket,” Tull told the purchasing committee. “Because I’m so confident that this product is exactly what this bank needs to get bigger.”
“An ‘Aha’ Moment”
Tull was betting that PrecisionLender would increase his lenders’ ability to execute risk-based pricing and that this change in outlook and approach would go directly to the bank’s bottom line.
To ensure that, a great deal of time was invested in the education and training of Union’s lenders, so that “they’re not just sitting in a room some place using the software, they’re developing an understanding of what’s going into [PrecisionLender].”
He can tell that’s happening, based on the positive feedback he’s gotten from his lenders, particularly about PrecisionLender’s ease of use and its functionality. But the more telling indicator for Tull is the discussions he’s having with his lenders more and more often.
As an example, he mentioned a recent phone conversation with a lender who was interested in doing a deal for a long-term, fixed-rate loan. The lender had called Tull wanting to know why the deal was being so “mispriced” by PrecisionLender and why it was requiring a much higher risk rating.
“You could just see the education process the lender was going through.”
“We peeled back the onion – it was an unsecured loan, it was a higher-risk credit – and you could just see the education process the lender was going through. It was kind of like an “aha” moment where you go, ‘Well of course an unsecured, riskier loan is going to require a higher yield to get you to the same target.’
“Those are the types of discussions I have just about every day.”
“We’ve Made It”
The same is true for the results. Tull said that on a daily basis he sees deals in which Union would not have been competitive if it were still using its old pricing tool. Now Union can win them, thanks to its much more refined and flexible approach to pricing – using all sorts of levers beyond just rate (term, floating, collateral, etc.) to structure deals.
“I felt like when we implemented PrecisionLender we were going to look back six months from then and say, ‘I can’t believe how we ever did this before we had this tool,’” Tull said. “That’s come true.
“I’m glad we’ve evolved to the place where we’ve made it.”
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