The Loan Request – the ‘First Date’ in a Long-term Banking Relationship

By Joe Cavaluzzi, Contributing Writer On Nov 5, 2024

New Jersey’s commercial banks remain active, though cautious, as they continue to lend to companies in the state’s largest and fastest growing business sectors while watching the economy and waiting to see how much the Federal Reserve will cut interest rates.

“We continue to look at middle-market companies. [Services here] vary from lines of credit for working capital and term loans for equipment to real estate loans for land development for companies expanding their headquarters locations,” says Wells Fargo Bank’s New Jersey Market Executive Peter Dontas, who oversees four lending teams that manages billions dollars. “It is a combination of healthcare and generic pharmaceutical companies that are based here, so we’re dealing with local executives.”

Kearny Bank views manufacturing, especially companies based in New Jersey that focus on quality control and maintaining competitive advantages, as one of the most favorable sectors for lending. Other industries that Kearny finds attractive include wholesale distribution, warehousing, transportation and logistics, building supply and materials, general and specialty contractors, food manufacturing and food service businesses, and professional services. 

“Companies in these sectors typically have strong balance sheets, which make them attractive as commercial clients,” says Robert Melchionne, Kearny’s director of commercial and industrial lending.

Interest Rates 

Dontas notes that Wells Fargo, while cautious in an uncertain interest rate environment, has not tightened its lending standards because the economy remains strong.

“There hasn’t been a recession. We look at credit quality; our clients continue to do well so we have very few problem loans in the portfolio,” he says. “You have to be cautious, but I wouldn’t say we have changed our position.”

Higher interest rates have impacted loan demand, however, and New Jersey’s commercial bankers are hoping for further interest rate cuts by the Fed.

Wells Fargo was lending at 7% interest in mid-September because the short-term borrowing mechanism, based on SOFR, has been 5.3% for the last two years, which is more than twice the long-term average of 2.23%, according to the Fed.

“Borrowing at 7% or 8% is real money,” Dontas notes. “Companies are being a lot more careful about inventory, expansion, and real estate unless they really need it.”

At the beginning of the year, Fed economists and the news media were looking for about six rate cuts. On Sept. 18, the Feds cut the interest rate by 50 bps, the first cut since the early days of the COVID-19 pandemic. It also indicated that it may cut rates by another 50 bps by the end of the year.

“I can see the Fed funds rate being down 150 bps [when all is said and done],” Dontas says. “That’s a pretty healthy decrease, primarily due to inflation being under control as opposed to a weaker economy, which is usually why they cut rates.”

Competition from Fintech, Private Equity & Private Capital

Melchionne says banks of Kearny’s size are not heavily impacted by private equity, which tends to direct investments toward very large companies, but fintech is a different story. 

“We do experience a degree of competition from fintech companies, given their quick turnaround times and convenient service delivery,” he says. “We compete with them by emphasizing a targeted, consultative sales approach to commercial relationships, as opposed to product dumping.”

While fintech and private credit are direct competitors to every bank, private equity impacts Wells Fargo the most when investors acquire one of the bank’s clients, impacting its customer base. Fintech has the advantage of speed, but fintech companies are usually doing transactions for treasury management.

“While they have a role in the system, the advantage we have is that fintech typically doesn’t lend and provide banking services,” Dontas says. 

However, private credit is playing a larger competitive role in specific situations. “It’s not for everybody, but it comes into play when your senior bank debt is tapped out and you need another form of capital.”

Partnering with the Competition

To address that need of clients who have maxed out their bank credit, some banks partner with their less regulated competitors. Wells Fargo formed a strategic relationship a year ago with Centerbridge Partners, a private investment management firm focused on direct lending to non-sponsor North American middle market companies. Centerbridge, with offices in New York and London, launched Overland Advisors to manage a newly formed business development company primarily focused on making senior secured loans. 

“Overland represents a transformative new business model for direct lending to middle-market companies, diversifying the market of clients served by private credit and direct lending,” Centerbridge said in a press release announcing the partnership last year. Overland was targeting a minimum of $5 billion in investible capital at the time, including a minority equity investment by Wells Fargo. Anchor investors include wholly owned subsidiaries of the Abu Dhabi Investment Authority and British Columbia Investment Management Corp. 

“Centerbridge is a partner for us to be able to go to our clients and provide client credit through a third-party that is willing to take incremental risks that we’re not willing to take,” Dontas says.

Advice for Loan Seekers

One thing that remains the same for businesses seeking a bank loan in the current economy, regardless of their size, is the necessity of being well prepared. 

Banks are looking for projections for the next 12 to 36 months and they want to make sure borrowers know their own business and markets.

“Business owners should be prepared to describe their operations from the top down, recognize essential personnel, discuss their customer base and suppliers, and make correlations between key business decisions and their financial statements,” Kearny’s Melchionne says. 

Potential borrowers need to make sure their financial statements are current and accurate. Bankers want to understand the business operations, the overall industry, obstacles, and the attributes that set the business apart from its competition. 

Melchionne notes, “It may help to think of a loan request as the ‘first date’ in a potentially long-term mutual business relationship.” 

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