Healing from the downturn

More than a year after Wells Fargo converted former Wachovia branches and as banks adjust to life under the Dodd-Frank Wall Street Reform and Consumer Protection Act, Wells Fargo”™s senior business banking executive in Shelton, Ron Coccaro, discussed the state of the markets with the Fairfield County Business Journal.

What is loan availability and demand today compared with a year ago?

“When we were going through the worst of times in 2008 and 2009, loan demand was soft. I think the banks were trying to kind of limit their losses, restricting credit. So I think there was a lower demand because businesses were retracting and ”¦ because the banks were trying to right their ship from a risk-portfolio perspective.

Since then we have been trying to aggressively increase our loan production ”¦ I can feel very confident saying over the past year that many (businesses) are healing from the downturn of 2008. We are seeing companies”™ balance sheets improve significantly. We are seeing less delinquent payments and less write-offs ”¦ Many businesses are starting to expand (that) held off in buying equipment the past couple of years and now some of that equipment needs to be replaced, so they are investing in their businesses.

It has improved. It is nowhere near the loan demand that we saw prior to the recession, but it is starting to improve. But I would categorize it still somewhat soft, but improving.”

Do you see any parallels between where we are today and 2003 and 2004 when we were last coming out of recession?

“I think so. I think small business customers, although they are improving ”¦ are investing because of need, not necessarily because they see huge opportunities going forward. That”™s a distinction that I see. I would characterize them as dipping their toe into the expansion waters, rather than jumping in ”¦ What we saw back in 2003 (and) 2004 was a big jump out of that slow period in the recession. We are seeing a slow trajectory upwards as opposed to a V-shaped recovery that we saw back in 2003 and 2004 ”“ big difference.

The other big difference is that the regulatory environment is significantly different than what it was. So the ability of banks to be able to lend with a different type of oversight has changed dramatically ”¦ Customers need to report more, we are less restrictive of loan-to-values that we used to be able to do, our reporting is increased, there”™s a lot more scrutiny and especially for the larger banks like Wells Fargo, which has a higher standard of regulatory oversight than some of the small, regional (banks) and the smaller S&Ls out there.”

For you, what”™s the one biggest headache brought about by new federal regulations?

“It”™s not a headache ”“ you have to adjust and make changes ”“ but the appraisal process, for instance, has changed dramatically. The valuations now are coming back much more conservatively, and it has to be an arm”™s-length transaction ”“ third party ”¦ Anything now that”™s secured with real estate ”¦ that is a short-term facility has to have annual reviews, so there”™s more education to the customers around that.

The requirements for renewals ”“ full documentation, the legal work that goes into that ”“ is a little bit more extensive. We have more reporting to the Fed in terms of our loans and how we classify loans in terms of the performance of that. So we have to be closer in terms of understanding what our clients are doing, if there”™s a perceived risk of default, all of that increases the monitoring, staying in touch with customers. I think the biggest impact is that it”™s been an adjustment for our customers as well as for ourselves.”

What”™s been the biggest adjustment customers have had to make?

“Well, there”™s been some changes in credit policy, quite honestly. In the past, on the consumer side ”¦ you (could) go up to 95 (or) 100 percent loan-to-value (ratio) back then. Now they”™re restricted to 70, 75 percent. Our credit policy on the business banking side now ”“ 75 percent loan-to-value (and) special-use property is less than that. There was more flexibility to get around some of those regulations, whether it was internal or external regulations.”

Is there any industry that is ahead on the loan demand curve?

“It”™s across the board. I think we”™re seeing a big slowdown in contractors and construction and anything related to commercial real estate. That”™s very soft out there ”¦ I don”™t know if commercial real estate is as seasonal. Projects can sometimes pick up or start depending on where they are because the weather changes. It”™s not necessarily like the residential housing market where the buying season is in spring ”“ it”™s a little bit different from the (housing) sales cycle. I just think there”™s less demand out there for new space. If businesses are not expanding at a high rate, there”™s going to be lower demand for (new) office space ”¦

Here”™s another change: When the demand was high for commercial real estate, it was easier for many of the real estate developers and contractors to find funding without having leases in place ”“ basically spec funding. That”™s not something any of the banks are willing to do at this point unless there”™s leases in place and they have high occupancies. Anything that is speculative, it”™s very difficult to get financing at this point.”

What is it like out there from a competitive point of view among banks?

“I think it”™s always been a competitive business. You are competing with large, money-center banks like ourselves and then you are also competing with some of the smaller banks that have their niches and markets and so forth. I would say that all the banks understand the value from a revenue perspective of loan generation, and how you can help the small business customers from the point of view of credit to expand their business … We have hired up for expansion of our business ”¦ In the White Plains market alone we had four relationship managers (RM), now we are up to seven, so we have nearly doubled the number of feet on the ground. We have increased our RMs in the Connecticut market as well, throughout the entire Northeast.”

That”™s ”˜RMs”™ not ”˜RNs,”™ right?

“Well, we are in the business of trying to help small business”™ health get back to where they were a few years ago, so in a sense we are nurses. We”™re banking nurses.