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From taxes to rates, important developments to track early in '17

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From taxes to rates, important developments to track early in '17

Kevin Dobbs is a senior reporter and columnist. The views and opinions expressed in this piece represent those of the author or his sources and not necessarily those of S&P Global Market Intelligence.

The new year promises to usher in change that could substantially impact community banks, most notably with a new U.S. president who vows to shake up Washington, slash taxes and roll back regulations that have weighed on lenders for years. Here is a look at three looming developments that could affect small banks in 2017.

Tax cuts

Republican President-elect Donald Trump has repeatedly promised to cut the corporate tax rate, calling for it to be lowered from 35% to 15%. Such a move could benefit community banks' earnings, and it also could bolster the strength of their commercial clients, potentially motivating those customers to reinvest tax savings in expansion projects. Bankers could help finance such work, a development that would result in loan growth and interest income advances.

While Trump will have a Republican-controlled House and Senate to work with when he takes over the White House in January, observers say the steep adjustment the president-elect wants could prove challenging. The Democrats still hold enough seats in the Senate to filibuster.

But with Paul Ryan, the top House Republican, on board and eager to make tax reform the No. 1 priority in the nation's capital next year, observers say a GOP-driven Washington will surely make a big push to lower taxes, with a more likely outcome of getting the corporate rate brought down into the 20s. "That to me looks like a real possibility," said Mark Fitzgibbon, head of research at Sandler O'Neill & Partners.

Regulatory rollback

In the years since the 2010 Dodd-Frank Act — U.S. lawmakers' collective effort to more thoroughly police banks and prevent another crisis like the one that rocked the country in 2008 — community lenders have struggled with increasingly heavy regulatory burden.

Trump has pledged to deregulate banks along with businesses of myriad stripes. The president-elect also has said he could try to dismantle Dodd-Frank. Doing away with the sweeping legislation altogether appears unlikely, analysts have said in the weeks since the election, because of strong opposition from Democrats along with a few pockets of Republican resistance. Incoming Senate Minority Leader Chuck Schumer of New York said in a post-election interview on NBC's "Meet the Press" that he could convince enough Republicans to join Democrats in a push against an all-out repeal. "We have 60 votes to block him," Schumer said of Trump while noting the vote count needed to filibuster and indefinitely delay a full Senate tally.

That noted, Schumer has conceded that some lightening of the regulatory load is bound to be on the table. And analysts say exempting community banks from several rules and requirements that were written for bigger banks is the most likely starting point, given that both lawmakers and regulators have, over the last couple of years, acknowledged that small lenders are grappling with onerous compliance challenges. Fewer regulations would lower banks' costs, enabling them to push the savings to their bottom lines.

Interest rates

The direction of interest rates, of course, will be top of mind in 2017. Federal Reserve policymakers on Dec. 14 lifted their key benchmark rate by a quarter percentage point to a range of 0.50% to 0.75%. It marked the first hike of 2016 and only the second such move since the financial crisis.

Banks have long been eager to see the Fed bring rates off of the basement levels at which they have hovered for years. In a higher rate environment, banks typically must pay more to customers for their deposits, but they often can boost rates even more on the loans they make, widening the spread between their funding costs and the income they pull in by extending credit. Improved profits often follow.

Fed officials, in their latest projections, have indicated they could lift rates three more times in 2017, as the economy strengthens around a solid job market. That pace of increase, economists and bankers have said, would likely bolster banks' interest income notably.

The combination of rising rates with lower regulations and taxes has fueled optimism among investors in the final two months of this year, resulting in a bank-stock rally.

But, some veteran bank observers say the market may be getting too far ahead of reality.

As Lawrence White, a professor at New York University's Stern School of Business who researches banking, noted in a December interview, Trump is a political newcomer with grand goals that make for a business-friendly skeleton, but time will tell if he musters the policy specifics needed to put meat on the bones. Investors, White said, "seem to be assuming an awful lot" from a U.S. capital that almost always moves slowly and, in recent years, "has not accomplished much."