Banking: Year in Review and What to Expect

Financial Services Law

2017 was a great year for banks across a wide spectrum, and we believe 2018 holds tremendous promise, so long as the credit condition of borrowers does not deteriorate and banks continue to lend prudently. Below we count down the top five takeaways in banking in 2017.

5

Show Me the Money

Capital markets activity was robust in 2017, with many public financial institutions responding to the strong financial markets by raising capital and a whole new set of private financial institutions completing initial public offerings, including Esquire Financial Holdings, Inc., Sterling Bancorp, Inc., and Luther Burbank Corp. Anticipated regulatory and tax relief following the election of President Trump was a big driver, and we anticipate that the momentum will continue in 2018 as long as the markets continue their upward trajectory (even if the movement is not as significant as it was in 2017). We also anticipate increases in dividend payments in response to tax reform, which may introduce new investors to the financial services sector.


4

M&A Remains Robust

For the past five years, advisory firms have predicted robust M&A activity in the financial services sector, and although that activity has continued at a steady pace, we still have not seen the predicted level of activity. A number of significant mergers were completed in 2017, including PacWest’s acquisition of CU Bancorp, Pacific Premier’s acquisition of Heritage Oaks Bancorp and Columbia Bancorp’s acquisition of Pacific Continental Corp., and we anticipate that 2018 will bring M&A activity at the same pace. With the recent tax reform and potential significant regulatory reform on the horizon, we expect valuations to increase, which will push institutions that have been on the sidelines for a long time into more active M&A discussions. Also, watch closely for the reemergence of mergers of equals.


3

The Return of the De Novo

The long-heralded demise of community banking may be overstated, as a slow, new crop of de novo banks were formally approved in 2017, turning the tide away from the nearly nonexistent new chartering over the last decade. The FDIC updated its guidance on de novo banking in May 2017, and the messaging from Washington has been that regulators are open for de novo business. Although we are confident we will never return to the level of chartering activity which occurred prior to the financial crisis in 2008, we remain cautiously optimistic that the pace for new bank charters will continue to improve. Also, pay close attention to the technology companies seeking full bank charters—some matters of first impression may soon come to the fore.


2

What to Do With All That Green

The legalization of the marijuana industry in many states has increased the demand to find an acceptable financial solution to legitimately bank these profitable businesses. Lots of ideas continue to surface and be explored, including various bank partnerships and consortiums, use of public banks, and adoption of special protections to ensure comprehensive oversight and transparency of the industry. We predict 2018 will represent a turning point in these efforts, with the federal government relaxing certain rules to enable the industry to be legitimately banked.


1

More Regulatory Relief on the Way

 With President Trump having successfully executed on his tax reform initiative, watch closely for additional regulatory reform, including movement (finally) on raising the SIFI threshold beyond $50 billion, additional focus on provisions of the Dodd-Frank Act to lighten the load (think Volcker reform) and relaxation of stress-testing requirements for those banks reaching the $10 billion threshold. With a full year under his belt, President Trump and his appointees in various agencies will have the incentive to continue to fulfill his campaign promise to reduce the burden of regulation.