Economic Outlook Financial Services: Industry Executives Hold Positive Outlook

Some economic factors may hinder growth for business clients, however. An increasing minimum wage is cutting into profit margins, and rising interest rates are expected to at least temporarily stymie lending, according to those interviewed.

Banking

“F&M is doing well, and we will continue to do well through ’17 and into ’18,” W. Henry Walker, president of Farmers & Merchants Bank, told the Business Journal. F&M is headquartered in Long Beach. With nearly $7 billion in assets, it is within the top 2% of banks nationally.

 “We’re growing. We have good organic growth in our marketplaces for deposits and number of customers,” Walker said. “And you know, we continue to do better than the competition.”

Michael Miller, president and CEO of Downtown Long Beach-based International City Bank, said he is looking into adding a mobile banking service for clients. (Photograph by the Business Journal’s Larry Duncan)

 Walker believes that the economy is strong, although he noted that California’s policies are burdensome on businesses. “The economy is continuing to be strong. But there is enormous pressure on labor and wages with continued increases in minimum wage,” he observed. “And California is expensive for businesses. And you have well-to-do people that continue to leave California because of the burdensome tax rates that we have.”

 Michael Miller, president and CEO of Long Beach-based International City Bank (ICB), said that his bank should continue to grow this year, although not at the same rate of increase as in 2016. “We had approximately 25% growth between 2015 and year-end 2016. Our budget for 2017 calls for about 15% growth,” he said.

 Miller’s positive outlook is based in part upon how the economy is doing. “GDP [gross domestic product] growth is slated to be at about 2.2% this year. So you know, not real strong, but still kind of going in the right direction,” he said. “The price of oil per barrel has been down, so that has enabled companies to save money from a transportation standpoint. That kind of factors into not only savings on a corporate level but also [for] consumers as well.”

 Both the residential and commercial real estate markets continue to be strong, which plays into ICB’s forecast as well, Miller noted.

 The Federal Reserve raised its federal funds rate from 1% to 1.25% on June 14, and Miller expects to see at least one more rate hike this year. “That will certainly affect the companies that borrow from us on a short-term basis, but rates are still low,” he said.

 Kris Allen, vice president and senior branch manager for First Bank in Bixby Knolls, said that business is steady this year. The branch is pacing ahead of its rate of growth compared to the same time last year, he said, adding that the same applies to First Bank’s overall operations. The family-owned bank has about $6 billion in assets.

 “One of the advantages of First Bank being a smaller, family-owned bank is that we are very nimble,” Allen said. “We are able to see what’s going on in the economy and the news and are able to make quick adjustments, whereas [in] your larger corporations there is a lot of bureaucracy, a lot of red tape that has to be approved at many different levels in order to get it done.”

 California’s increasing minimum wage is affecting First Bank’s business clients, according to Allen. “It’s a bit detrimental to some of the business owners because it’s cutting into their profit margin and making it a lot smaller,” he explained.

 To respond to that economic pressure, First Bank launched a lending campaign this year that offered competitive rates for lines of credit and loans. “Even if it’s a 5% or 10% discount, that adds back to the profit margin that they lost. And by us offering lines of credit at a very competitive rate, it really helped them out, helped them get through this slow time for them.”

 Any increase in interest rates, no matter how small and no matter how low rates are, affects First Bank dramatically, according to Allen. But the resulting stall in lending activity is typically temporary, he noted. “Eventually, the businesses react and borrow as needed.”

 Both Walker and Miller noted that smaller banks continue to consolidate, a trend Walker attributed to a burdensome regulatory environment. “When I started in banking 30 years ago, there were close to 20,000 banks in this country. We are down to 5,500 today,” Walker said.

 “What Dodd-Frank has done is it has hurt the average consumer,” Walker said. “I think that gets lost. Everybody thinks they are going to control or punish the banks. No, that’s not going to happen. What’s going to happen is the average consumer is going to be hurt.”

Kris Allen, vice president and senior branch manager of First Bank in Bixby Knolls, noted that some of the bank’s small business clients are struggling with shrinking profit margins due to an increase in the minimum wage. (Photograph by the Business Journal’s Larry Duncan)

 The decreasing number of banking choices due to consolidations is just one way consumers are being affected, Walker argued. Other problems include banks downsizing branch staffing and services, he explained. He pointed out that F&M has done the opposite.

 Given the current dynamics of the local single-family real estate market, which is facing high demand with very limited supply, potential homebuyers are being forced to make offers in cash because they cannot obtain a loan quickly enough to compete with other offers, Walker noted.

 “It puts the regular consumer at a substantial disadvantage if they don’t walk in with a full cash offer and close in 30 days,” Walker said. “Well, you can’t fund a loan in 30 days. It’s impossible because of all the regulations, all the disclosures.”

 Walker is optimistic that there could be reforms to Dodd-Frank, which was put in place to regulate banks and reduce consumer risk. He argues that the act goes too far. “Dodd-Frank really could have been designed for just the biggest banks in the country,” he said. “The five biggest banks control almost 75% of all the deposit dollars in the country. Yet Dodd-Frank and all the regulations affect all the banks, all the way down to the smallest, when there is no risk.”

 Walker added, “I am hopeful that there are all kinds of reform from Washington, both in banking and nonbanking [sectors].”

 Miller noted that regulatory reform would provide relief for ICB as a small business bank. “I’d say our biggest challenge as a smaller bank is our cost from the standpoint of the current regulations,” he said. “There are really no signs yet that that is going to change, although I know there have been certainly discussions about that. But it kind of remains to be seen what will take place in the second half of this year.”

Accounting And Wealth Management

Thanks to positive economic indicators, accounting and wealth management firms in Long Beach are expecting considerable growth by the end of the year.

 “We’re targeting double digit growth, revenue wise. A minimum of that. Hopefully more,” John C. Abusaid, president and chief operating officer of Long Beach-based Halbert Hargrove, said. Halbert Hargrove is a fiduciary wealth management and investment advising firm.

 “We’re always cautious, but things are looking good,” Abusaid said. “We are in fact looking at doing a little bit of some face-lifting here at the office. We are in the middle of negotiating our lease to stick around another at least seven years, so that’s in the works. We are excited about that right now.”

Overall, most investors are feeling positive, Abusaid said. “I think in general what the market has done over, say, the last seven years [is it] has rewarded people with pretty healthy returns,” he noted.

Rising interest rates are likely to impact investment returns, Abusaid noted. “We have been making sure our portfolios are going to deal with that correctly so that our overall returns stay competitive and stay at a point where we are adding value to clients as we have traditionally done,” he explained.

The Department of Labor’s new fiduciary rule requires all financial advisors who provide retirement planning advice to act as fiduciaries. Unlike general advisors, fiduciaries must act in the best interest of clients. The impending implementation of this rule is “rocking a lot of boats out there,” according to Abusaid.

Halbert Hargove already operates under fiduciary guidelines and is only going to have to make a few adjustments in documenting and disclosing certain information, according to Abusaid. “That’s a new wind behind our back or wind at our sails because that is how we’ve been operating,” he said of the rule.

The accounting industry is the “hot sector” among the financial services industries at the moment, according to Blake Christian, partner with accounting firm Holthouse Carlin & Van Trigt. The firm has an office in Downtown Long Beach.

“We are still on a good revenue path. We’re up double digits, and that’s off of $130 million or so in revenue,” Christian said.

The national accounting industry is undergoing a hiring spree, according to Christian. “We will hire over 100 people nationally. That’s in 11 offices,” he said. “We don’t see it slowing down for the next few years, so it’s a good industry to be in.”

Christian’s clients feel positive about future business prospects. “Where I see a lot of hesitation is just because of the gridlock in Congress that we have had for so long,” he said. “And I think the uncertainty on what the tax reform is going to look like exactly, what the Trump administration is going to be able to get through, people are kind of sitting on the sidelines. They are hesitant to make big capital investments because maybe there is more benefit to making capital investment in the future rather than right at the moment.”

Christian remains optimistic that some tax reforms may be in store this year. “You may not get everything through, but I think the basic rate restructuring and lower rates on flow-through entities and those types of things, I think we will see that by year-end,” he speculated.

“I would like to see more liberal expensing of capital expenditures,” Christian said. “At different periods of time, they have allowed 100% write-offs, and that is what Trump is pushing for with capital expenditures,” he pointed out. “I don’t think there should be an unlimited amount. . . . But certainly, the middle market companies [valued at] $100 million or less, those are the real backbone and create a lot of jobs. And so I would like to see them be allowed to more aggressively expense items.”