Manishi Parikh
Market Executive
Commercial Banking, Orange County
Wells Fargo
Following a steady diet of Federal Reserve interest rate hikes, Orange County businesses are reevaluating their financial direction and priorities.
While the intention for the interest rate increases has been to curb inflation, it has also given businesses the opportunity to rethink their strategy.
Recently, PricewaterhouseCoopers released its Pulse Survey Results indicating that U.S. business owners express more optimism about the economy than a year ago. Concerns about a recession have dropped by 18% since last October.
However, leaders continue to reference concerns about rising costs, managing labor and resources, reducing risk, and improving efficiencies.
Certainly, these concerns merit attention, but from a banker’s perspective, 2024 could be the chance to develop a business plan that withstands economic headwinds.
Identify what can and can’t control.
Acknowledge what is happening around you but focus on what you can control. By focusing on providing quality products and services, improving the balance sheet, and increasing efficiency, Orange County business owners may be better positioned to address the needs of their companies rather than staying in a constant reactionary mode.
Conduct regular stress tests simulating possible outcomes and scenarios to ensure the viability of their business. Through regular stress testing, businesses can address different scenarios that will allow for planning and action.
Companies looking to preserve and increase their liquidity could also seek additional lending options such as asset-based lending (ABL). ABL allows businesses to leverage their assets during economic cycles to increase borrowing capacity, creating flexibility when pursuing business goals.
Pounce on growth
Orange County companies that have been strategic and carefully maintained their balance sheets may be able to reap the benefits with opportunities for acquisitions and growth. In 2024, the opportunities to improve efficiencies and favorably position themselves will be considerable, especially through digitization, cash flow management, and capital deployment to grow the business.
During a time of economic uncertainty, this year is certain to be pivotal for many businesses. That can feel daunting, but those who stay focused, proactive and analytical can stack the odds in their favor.
Richard Cabrera
Head of Middle Market Banking
Umpqua Bank
The resilient, well-diversified Orange County economy has held up well throughout the last couple of years. We are not seeing any signs of softening. We have residential real estate prices that remain strong because of limited supply, and there is an influx of international residents who want to live in OC. Traffic in the region is exceeding pre-pandemic levels, which has always been an indicator for me of economic activity.
The major sectors that power the OC economy are holding up well: construction, healthcare, financial services, engineering, legal services, entertainment and education.
The three major trends we are seeing in this part of Southern California are:
n Rapid use of artificial intelligence in payment systems and processing of work.
n Increasingly more mobile commerce.
n Companies continue to make cybersecurity enhancements to protect their systems.
As in 2023, the focus for many businesses continues to be on improving productivity, efficiency and cashflow. As I have shared previously, the best companies with the best management teams and good strategic plans are going to thrive because they will gain market share from weaker competitors.
In terms of interest rates, the latest job report was strong, and the Federal Reserve indicated it will stay the course—“higher for longer”—to curtail inflation.
We are forecasting three Federal Reserve rate cuts this year, and probably in the third or fourth quarter, barring anything that comes out from left field.
Nationally, operators continue to move their supply chains closer to home and there is a repositioning away from China and Southeast Asia into Latin America and Mexico in particular.
For businesses, this means better line of sight to production and timelines.
Overall, we are seeing good flows of goods coming into our ports, bringing a sense of stability if not optimism.
Kevin Tiber
President
F&M Bank
The favorite part of my role at F&M is visiting the clients and communities that we serve in Orange County, on some days from La Habra to San Clemente. The Bank’s culture of “boots on the ground” also provides pretty good insight into the strength—or weakness—of our local economy.
Despite the Federal Reserve’s rate hikes, which began nearly two years ago, our local economy appears to have weathered the rate cycle pretty well with limited exception. I can’t say that I am necessarily surprised, as the Orange County economy is dynamic and diverse as evidenced by any weekly edition of the OCBJ.
With prior economic cycles offered as evidence, I expect Orange County to weather a recession better than other parts of the country.
Whereas the guidance from Federal Reserve Chairman Jerome Powell has been three rate cuts in 2024 and the general consensus from other forecasts are currently three to four rate cuts in 2024, we at F&M are looking for five rate cuts this year totaling 125 basis points beginning with the April-May meeting.
From our Main Street view (and F&M really does have a Main Street branch), the vast majority of the pandemic stimulus funding has been spent, credit demand is softening, and capital and consumer spending is slowing. Much of the economic resiliency we have experienced recently was by virtue of unprecedented local, state and national government spending which (in theory) should be slowing due to significant budget deficits across multiple government agencies.
The combination of the above and other factors will likely decelerate GDP growth precipitously which may require expedited Federal Reserve policy actions to reduce rates. If the front-end of the rate cycle taught us anything, it is that these are unprecedented times that defy Fed models. Remember “transitory inflation”?
John DeCero
CEO, President
Mechanics Bank
We believe Orange County’s overall economy is doing fairly well, even with inflationary pressures that continue to be of concern around the state and the nation, pointing to higher interest rates for longer than most anticipated.
Despite this prolonged high-interest-rate environment we’re experiencing, the local housing market is holding up, thanks in part to low inventories, and the low interest rates that were locked in over the past several years. No one wants to give up that valuable low interest-rate mortgage on their house unless they absolutely have to.
Credit quality and exposure to commercial real estate (especially the office building sector) is generating some headlines in the banking industry at the moment, and rightfully so. A growing amount of empty office space is putting pressure on commercial mortgages, which are likely to impact our industry to some extent in the coming months and years.
We’re fortunate that our balance sheet is made up of very high-quality assets, and we have very little loan exposure in the commercial real estate investor-office sector. In fact, we have strategically reduced our sector exposure by approximately 50% over the past four years.
As of Dec. 31, 2023, our exposure was just 4.3% of the Bank’s entire loan portfolio, and both the sector and our overall portfolio are performing quite well, which is also a tribute to our relationship-style of banking.
As for interest-rate cuts, I expect the Federal Reserve will not take any action for the first half of this year due to January’s Consumer Price Index price increase of 3.1%. Another metric to watch is the unemployment rate, which, if it rises, could significantly pressure rates downward. Taking both measures into account, the second half of 2024 could be very interesting. Hold on, everyone.
Joseph Hensley
Commercial Banking Market Leader,
Orange County U.S. Bank
Like many coastal regions, Orange County has seen a steady outflow of residents to surrounding inland areas where the cost of living is lower.
With a median household income of around $100,000 and a median home price of $1,265,000, it’s easy to see why.
It’s imperative that we continue to invest in affordable housing options and provide consumers with down payment assistance programs and increasingly flexible loan options, including opportunities to buy down stubbornly high rates.
On the other hand, the gross regional product remains a robust $284 billion—larger than that of 25 states. While business owners in the region are looking to cut costs, we’ve seen that more than 80% of them are investing in their businesses to resolve inefficiencies, according to our recent surveys of financial leaders and small business owners throughout the state.
Much of that investment is going toward digital solutions, such as products and services that range from selling goods online to emailing customers and managing their workforce.
Affordability will continue to be an indicator to watch this year for consumers and businesses alike.
Thankfully a healthy job market has softened the blunt of high prices and the region’s 3.2% unemployment rate continues to outpace the national benchmark of 3.7%.
Ethan Morgan
Managing Director
Market Manager Orange County
J.P. Morgan Private Bank
The question for Orange County this year is how much resilience and patience our economy can bear in the face of less than certain expectations.
There is a broad consensus in the market that the Federal Reserve will cut rates this year. Similarly, economic models point toward slowing inflation that reinforces this expectation of the central bank.
February’s CPI report, however, reminded us that inflation is stubborn and remains a looming threat. That said, we still expect it to move steadily downward and ultimately force the Fed’s hand.
How banks respond to altering rate environments will present new challenges and opportunities for the industry’s growth. Similarly, how consumers in Orange County anticipate new rates have the potential to further accelerate or diffuse headwinds across key regional industries like real estate, technology, healthcare and consumer retail.
