Part One of a series of observations on the evolution of commercial banking.
The Old Way
For most of my career, an internal bank report showing every commercial loan a bank had outstanding, broken down by property type, location, industry, size, and risk profile, took legions of people months to prepare. By the time it came out, so much time had passed that everyone knew it provided little more than a ballpark view of what was going on.
These reports took so much effort that many regional and community banks couldn’t create them at all. They didn’t have the people or the systems for it.
That’s part of how smaller banks earned a reputation as relationship lenders. In those days, if your banker knew you and your business well, and you paid your bills on time, they could lean pretty hard on that relationship history to get a loan approved.
The largest banks were already managing their portfolios this way, of course, and many bankers from that era will remember what happened when they decided they had too much exposure to a particular industry or asset class. They could exit large numbers of otherwise good relationships at once, sometimes rather unceremoniously.
That wasn’t much fun for the customers being shown the door, but it created opportunity for smaller banks. Good borrowers who suddenly didn’t fit one bank’s strategy became attractive prospects for another.
Relationship banking created a different problem for banks. How do you grow if your best loans keep going to the customers you already have?
The New Way
The analysis isn’t new. What’s new is the speed.
Banks have invested heavily in technology and data that give them a much clearer, more current picture of their loan portfolios. Software like nCino can provide real-time information about loans and put it in the hands of the people making lending decisions every day, not just the back office.
I’ve watched this evolution from inside commercial banks for most of my career, through the Great Recession, the long recovery that followed, and COVID. In my view, the important change isn’t simply that banks have more data. It’s that the information is now available early enough and widely enough to influence individual lending decisions in real time.
Every bank is chasing its own version of an ideal mix of loans. Think of it like you or your financial advisor setting a target mix for your 401(k), some in stocks, some in bonds, some in cash, with regular rebalancing as things change.
A bank’s version might mean limiting how much it lends to restaurants, or in one town, or against office buildings versus warehouses. No two banks define “ideal” or “diversification” exactly the same way. Banks are as different from each other as people are.
Today, local banks, the ones historically known for relationship-based lending, can watch this information much more closely. In some cases, they can react to it faster than a large bank can.
A large bank might need approval from several layers of management before changing course on a particular type of loan. A community bank might just need its chief credit officer to say the word, and one or more lending spigots are turned off.
That’s why a local bank’s appetite for a certain kind of deal can change surprisingly quickly.
Ever have a banker tell you, “The timing isn’t right”?
Now you know one reason why.
The same information tells relationship managers, the people you’d call your banker, which types of businesses to pursue and which ones the bank doesn’t need more of right now.
But here’s an important distinction: your relationship manager generally isn’t the person who approves your loan. That decision belongs to a credit officer or credit team.
One of the first filters they apply is the same portfolio information we’ve been talking about.
Large banks have taken this almost to the extreme with small business loans. Most small business relationships are handled at the branch level, where lending decisions have become increasingly automated. A loan request can go into a system that measures it against the bank’s credit parameters and essentially spits out an answer. There is room between a “yes” and a “no,” but you don’t want to take that.
“Small business” doesn’t necessarily mean small anymore, either. Banks have steadily expanded the size of the companies and loan requests they handle this way.
Larger commercial loans still involve considerably more human judgment. They should. Some of the most important things a bank considers, including the character of the borrower, aren’t areas where machines are particularly useful. Knowing how someone has handled difficult situations, whether they do what they say they’ll do, and how they’ve treated the bank over time still matters.
But the portfolio report doesn’t go away just because humans are making the decision. It’s sitting in front of the credit officers making those decisions.
Either your loan helps move the bank’s portfolio toward where it wants to go, or it doesn’t.
If you’re on the right side of that report, good for you. If you’re not, you’re already a lap down.
That doesn’t mean the loan won’t get approved. But if a credit officer is going to approve a deal that moves the portfolio further away from its targets, that decision needs to be defensible.
That’s when your banker starts hearing things like, “We’ll do this deal, but we’re going to charge more,” or, “We’ll do it, but only with more controls built into the loan agreement,” otherwise known as covenants.
The bank may still make the loan. It just wants to be paid more for doing it, take less risk, or both.
What It Means for You
The very best deals still get done in just about any environment. If a new loan improves the overall quality of the portfolio, it’s usually worth putting capital to work.
But most deals aren’t perfect.
Your credit quality matters. Your collateral matters. Your cash flow matters. Your relationship matters.
So does something you can’t see: how well your particular loan fits what that bank wants more, or less, of right now.
That can have a surprisingly large influence on the terms you’re offered.
In other words, your relationship bank’s “eh” can be another bank’s “hell yeah.”
A bank you’ve never talked to might be hungry for exactly your kind of deal right now, for reasons that have very little to do with how well they know you.
Why This Makes Brokers More Valuable Than Ever
You’d think better data at the banks would make a broker less necessary.
I think it’s the opposite.
Good bankers still advocate for their clients, and relationships still matter. But there’s a practical limit to how far that advocacy can go when everyone involved in the decision can see that the bank is already heavy in your property type, industry, geography, or risk category.
Bankers and credit officers can still go to bat for a deal that doesn’t fit neatly into the bank’s current priorities. But they have to choose which fights are worth having.
Making the case for an unusual deal for an important client is one thing. Repeatedly advocating for loans that run against what the bank’s own portfolio data says it needs is another. Eventually, there’s internal reputational risk. The question becomes whether you’re exercising good judgment or simply ignoring what the bank is telling you it wants.
Even the best relationship manager in your market can’t tell you which other banks are hungry for your deal right now.
That’s not public information, and it’s not his or her job to track it.
A good broker knows the banks and bankers in the region, along with lenders from outside the area that may be eager to add a loan tied to your local economy. More importantly, a good broker knows what those lenders are looking for and how to package a deal so the credit officer has what he or she needs to evaluate it.
Your banker should know how to make your case inside one bank. A good broker should know where that case is most likely to succeed before it ever gets there.
For What It’s Worth
Not every bank loves working with brokers.
But think about what’s happening on the other side of the table. Banks are investing heavily in better ways to gather, organize, and use information so they can be more selective about the loans they make.
It makes sense for borrowers to get better at lender selection, too.
A broker who understands a bank’s strategic targets can bring it exactly the kind of deal it’s short on, instead of the bank spending months trying to find those loans through cold calls and prospecting. That’s just working smart. And honestly, it’s a much more efficient channel.
For the borrower, that can pay off in ways you can actually put a number on.
It can mean the difference between one lender capping your loan at 60% of the deal’s value and another being willing to go to 70%, which is real equity you don’t have to raise.
It can mean fewer covenants restricting what you can do while the loan is outstanding. It can mean a bank willing to skip the personal guarantee altogether.
And don’t get me started on the dreaded deposit requirements.
Those aren’t small things.
A few extra points of leverage, fewer restrictions, or one less signature on a guarantee can be worth far more over the life of a loan than what you’d pay a broker to find the bank that actually wants your deal.