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Camera-ready art of "Regional Outlook" (505Kb PDF file - PDF help or hard copy)
In Focus This Quarter
Merger and Acquisition Activity in the U.S.
Banking Industry: Trends and Rationale--The
size and value of recent mergers and acquisitions (M&A) in the
banking industry have received much attention, yet the activity
is
a continuation of a longer-term trend and is one aspect of a
broader national and global wave of business mergers. For banks,
deregulation, competitive pressures, market valuations,
synergistic
opportunities, technology, globalization, and managerial
incentives
are among important drivers of the trend. By identifying the
rationale and incentives for bank M&A activity, industry
participants can better understand and evaluate the risks and
challenges facing merged institutions.
By Steven E. Cunningham, John F. Sherman
Risks
and Challenges for Consolidating
Institutions--
M&A activity creates significant challenges for bank managers,
including combining management teams, integrating technology,
realizing the benefits of diversification, and maximizing
operating
economies. As premiums paid in bank M&A deals have escalated,
some
industry observers have questioned whether the promised benefits
of
the transactions can be realized. Institutions in the process of
integrating an acquired entity may be especially vulnerable to a
downturn in the economy.
By John F. Sherman
Industry Consolidation Presents Unique
Risks
and Challenges for Community Banks--Industry
consolidation has created competitive challenges for small banks
and highlights traditional obstacles related to operating scale
and
scope. Aside from merging with or selling to competitors, some
small banks are addressing consolidation challenges by
outsourcing
business functions, expanding the use of nondeposit funding
sources, partnering with other banks and nonbanks, capitalizing
on
personalized service, and focusing on niche markets. While these
adaptive strategies may help community banks meet the challenges
of
industry consolidation, they potentially complicate these
institutions' operations and risk profiles.
By Steven E. Cunningham
Regional Perspectives
Region's Economic and
Banking Conditions--Economic growth in the San
Francisco
Region continues to outperform the nation...several factors have
begun to slow
growth...including the ongoing effect of the Asian crisis...and a
series of economic shocks in
the summer that have dampened consumer expectations...despite the
slower job growth, the
Region's insured financial institutions are reporting strong
earnings and solid asset quality.
Consumer Credit Portfolios Face
Challenges--A recent spurt in household
spending was supported
partly by the restructuring of existing debt...and the assumption
of additional debt...such actions
have had implications for not only credit quality but also the
composition of loan portfolios in
the Region's institutions...in this environment, lenders may want
to continue monitoring not
only underwriting standards, growth in their consumer portfolios,
and gain-on-sale assumptions
but also pricing and reserve levels for subprime loans.
By Catherine I. Phillips-Olsen, Gary C. Zimmerman, Millen
L. Simpson
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