The Bank M&A Wave Is Coming…Can You Catch It?

The US banking industry appears to be on the brink of a major shift, with recent consolidation activity accelerating at a pace not seen in years. July alone saw bank deals surge to nearly 7% of total banks, a significant leap from the first half of the year and well above the decade-long average (Display). What’s fueling this resurgence? After an unusual lull in bank M&A in recent years, the barriers to bank mergers and acquisitions are lifting, setting the stage for a new wave of consolidation. 

What’s Fueling the Surge in Bank Mergers?

Two primary impediments—rising interest rates and regulatory uncertainty—are showing signs of improvement. We think that could lead to a sustained pull-through in bulging bank M&A pipelines.

1. Deal Math No Longer Disrupted by Rates. In 2022 and 2023, interest rates shot up quickly—both for short-term and long-term loans—after a rush of liquidity into the banking system following multiple rounds of government stimulus. As a result, the fair value of loans that banks had previously issued at much lower rates dropped. When one bank buys another, M&A accounting requires the acquirer to adjust the value of the target bank’s assets to reflect current market values. With the spike in rates, that rule created a substantial capital hit for an acquiring bank to absorb. Today, however, we estimate that these “marks” have been cut in half relative to the peak across the entire banking system (Display). The improvement is due to both long-term interest rates leveling off and loans maturing over time. For most banks, the remaining adjustments are now quite manageable, in our view, thanks to strong earnings and the potential for significant cost savings from bank mergers.

 

2. Regulatory Environment Has Materially Improved. The Trump administration’s deregulatory efforts are already taking root in the US banking sector, removing some barriers to merger activity that had emerged under the previous administration. New leadership at bank regulatory agencies has already rolled back proposals that would have curbed some types of mergers. Bank CEOs report a clearer and more predictable regulatory environment for potential bank merger combinations, and we’ve already seen faster approval and closing times for these deals (Display).

 

What Does This Mean for the Future of Banking?

With the deal calculations adding up again and factoring in quicker timelines, we believe the industry is poised to return to its normal “cruising speed” of about 4% consolidation—meaning one in every 25 banks is likely to be sold each year. What’s the best way to capitalize on this wave of bank mergers? We think investing in shareholder-oriented community banks could be a smart move.

Smaller community banks are often the ones being acquired, and historically, their shareholders have enjoyed premiums of over 30% over the long run when these banks are sold. In our experience, a portfolio of community bank stocks can experience a much higher takeover rate than the industry average of 4%, especially if these banks are run by management teams and boards with significant personal investment and a focus on maximizing shareholder value. A portfolio with a 20% merger and acquisition turnover rate—with an average takeover premium of 30%—could yield an additional 600 basis points of return, with limited correlation to the broader stock market.

Right now, the case for investing in community bank stocks is as strong as it has been in decades. Unlike the broadly owned and heavily traded stocks of mega banks like JPMorgan Chase, Citigroup, and Bank of America, community bank stocks are still trading at deep discounts to both their long-term and pre-pandemic averages (Display). For instance, micro community bank stocks are trading at less than 0.9 times their tangible book value, which prices in concerns about a recession and dearth of merger activity. Historically, these stocks have traded at over 1.3 times their tangible book value when the industry is consolidating at its normal pace. This makes the resurgence of bank mergers a potentially significant catalyst for stock performance.

The bank M&A wave is not just on the horizon—it’s already crashing ashore. With barriers lifting, the stage is set for a new era of consolidation and valuations make it more likely to continue. For savvy investors, the undervalued community bank stocks offer an attractive opportunity to ride this wave. The future of banking is reshaping before our eyes. Don’t just watch the wave—catch it.