The Great Resurgence of Mergers and Acquisitions

As we enter 2025, there are a multitude of factors indicating that this year will see a resurgence of merger and acquisition (M&A) activity among banks and credit unions. The primary factors for increased consolidation include economic conditions, a change in administration and related regulatory impact, technological investments, a heightened need for scale, and evolving consumer expectations. In the following paragraphs, we highlight many of the factors that SRM is tracking to help our clients prepare for the new dynamics the industry faces this year.

Three Lackluster Years of M&A

While financial institution M&A activity ticked up a bit in 2024, it's still significantly down (over 80%) compared to a highly active year prior to the pandemic. As of November 2024, 108 US bank deals were announced, which represented another temperate year on the M&A front from both a number and asset size perspective. In fact, only six deals represented a value of $900M in assets or greater. Some highlights include SouthState acquiring Independent Bank and UMB buying Heartland. As of November 2024, credit unions have announced 133 mergers, which is in line with previous years (145 in 2023 and 163 in 2022). However, the standout statistic is that 2024 represents $27.5B in assets sold versus $9.8B in 2023 and $6.8B in 2022. The primary driver of this difference was First Tech's announcement to merge with Digital Federal Credit Union ($12B). Many CEOs have speculated that with the increased regulatory uncertainty, financial institutions have focused on improving technology, increasing operating efficiencies, and diversifying product lines to achieve their strategic objectives. They also shared a belief that there is a pent-up M&A demand that will accelerate with anticipated regulatory ease brought on by the transition of power in the White House.

M&A Considerations are Slightly Different Between Banks and Credit Unions

While there are similar motivations, like increasing economies of scale and expanding products and services for credit unions, a few different motivations exist. When reviewing data collected by NCUA, the primary reasons for credit union mergers over the past few years included:  

One area that has seen an increase in M&A activity is credit unions buying banks. 2024 saw a 50% increase in the number of these deals compared to previous years. The motivational drivers included expanding service areas for members, developing products and services (specifically commercial capabilities), and gaining talent. One example is Global Credit Union's purchase of First Financial Northwest Bank. This acquisition helped accelerate Global Credit Union's technological capabilities and improved shareholder value to First Financial. Many in the banking industry have raised concerns about being able to compete for future acquisitions if credit unions continue to leverage their tax-advantaged status. While past years have been relatively small in terms of bank assets acquired by credit unions, recent years have become more significant.

Opportunity Costs are a Major Consideration

One significant challenge many institutions struggle with is the opportunity cost associated with a merger. The impact a merger or acquisition has on an organization's resources is substantial. Often, organizations need to weigh the benefits of a merger against the impact it will have on technology enhancement projects or customer service improvements. The consolidation activities frequently rely on similar resources, adding a layer of complexity, increasing organizational stress, and potentially delaying long-planned projects.

A less tangible but highly important factor most financial institutions seek is cultural alignment in terms of commitment to communities, employees, customers, and overall organizational values. Lack of alignment can lead to friction, employee turnover, customer attrition, and lack of success. There are many factors boards and management teams must weigh as they determine whether an M&A deal is right for their organization.

SRM is Seeing a Change in Issuers' Appetite to Pursue Mergers and Acquisitions

There are several reasons why we believe 2025 will demonstrate a resurgence in M&A activity.

• Interest Rate Uncertainty and Ever-Increasing Compliance Burdens are Pushing Financial Institutions to Focus on Economies of Scale: While one should be happy about the recent job reports, all indications suggest we will remain in an environment of sustained higher interest rates. Higher rates often benefit net interest margins for larger, well-capitalized institutions, but smaller banks and credit unions can find it increasingly difficult to compete. Smaller institutions rely more heavily on deposit-centric business models and fixed-rate loan portfolios, which tend to underperform in high-rate environments. While larger institutions can diversify their income streams to weather the pressures of rising rates, small and mid-sized FIs are focused on increasing economies of scale, implementing new technology to improve efficiencies, reducing overhead costs, and finding a broader customer base. These changes can often be realized more quickly via M&A.

• Regulatory complexity is expected to ease with the new administration: As this new administration takes office and takes action, the industry is expecting fewer delays and hurdles for M&A approvals. Over the last few years, we heard from many executives and boards that with the regulatory uncertainty, they preferred to focus on internal technology and process improvements to gain the necessary efficiencies versus long, drawn-out processes that could potentially fail to complete, like the TD and First Horizon merger. Now, as these same teams look to improve technology, products, and overall customer reach, mergers and acquisitions could become a faster path to achieve these goals. For many smaller institutions, merging with larger counterparts offers a lifeline. Consolidation provides greater access to the technological and human resources needed to navigate the increasingly competitive financial services industry. This dynamic is particularly pronounced among credit unions, which often operate on slimmer margins than traditional banks. As seen in the chart here, the average credit union involved in a merger was between $20MM-$40MM in assets. Another challenge for smaller financial institutions has been keeping up with costs associated with regulatory compliance, making it more challenging to invest in new technologies and products. Mergers are a way for smaller institutions to achieve the scale needed to accelerate these investments.

• Technological Disruption and Digital Transformation: The banking industry is undergoing a profound digital transformation, driven by the rise of fintech competitors, artificial intelligence (AI), and changing consumer expectations. In 2025, the adoption of real-time payments, digital wallets, and payment hubs has reached critical mass, leaving many smaller institutions struggling to keep pace. To remain competitive, banks and credit unions need to invest heavily in technology to improve customer experience and operational efficiency. For smaller players, these investments can be prohibitively expensive. Merging with a larger organization may allow them to leverage advanced digital platforms and access new revenue streams through technology-driven services. Meanwhile, for larger banks, acquiring smaller institutions is an effective way to expand their market share while integrating innovative technologies developed by their targets.

• Consumer Demand for Convenience and Customization: Modern consumers demand seamless, personalized financial experiences, whether through mobile apps, online banking, or in-person interactions. As younger generations continue to prioritize convenience and customization, banks and credit unions are under pressure to modernize their offerings. M&A offers a solution to this challenge. By consolidating, institutions can pool resources to enhance their digital banking services, data analytics capabilities, and customer support systems. This not only helps retain existing customers but also attracts new ones, particularly tech-savvy millennials and Gen Z consumers.

• Private Equity Interest in Financial Institutions: Private equity (PE) firms have become increasingly active in the banking sector, drawn by the potential for high returns through consolidation. In past years, there was a significant investment in fintech firms ranging from Chime, Varo, and Dave. In 2025, PE-backed acquisitions could drive a substantial portion of M&A activity focusing on the mid-sized bank and credit union space. PE investors bring the capital and expertise needed to execute complex transactions, modernize operations, and drive growth. Their involvement often accelerates the pace of consolidation as institutions seek to capitalize on favorable valuations and strong demand from PE firms.

• Geographic Expansion and Market Share Growth: For banks and credit unions, M&A provides an efficient way to enter new markets and expand their geographic footprint. In 2025, regional and community banks will look to merge with institutions outside their immediate service areas, driven by the need to diversify their revenue streams and mitigate localized economic risks. This trend is especially relevant for credit unions, which are leveraging strategic partnerships to compete with larger banks. By consolidating, credit unions can achieve the scale needed to offer competitive rates and enhanced services to their members.

That said, acquirers will face some headwinds as they search for potential targets. Deal multiples are down from historic highs, and while that may reduce the cost of a transaction, sellers may be holding out until multiples start to rise… Or at least until macroeconomic conditions and competitive dynamics make anything but a sale inevitable. So while conditions are ripe for a surge in transaction interest, 2025 may not be a peak year for actual dealmaking.

Potential Winners & Losers

While the outlook for M&A in 2025 and beyond is strong, potential winners could include regional financial institutions that are looking to increase scale, enter new markets, and grow at faster rates than organic growth allows. Credit unions will also be able to deliver a broader range of new products and compete better by combining organizations. We also think less merger scrutiny and regulatory oversight will accelerate complex deals like the Capital One /Discover transaction.

Another potential winner is super-regional institutions, who may be more inclined to look at mergers of equals or much larger transactions than recently seen. Some potential losers in this process could be consumers and other stakeholders who could be negatively impacted by a decrease in competition and an increase in overall fees in certain regions. Low-income programs could also be under more risk, as regulators are potentially decreased in numbers and regulations loosened.

The Bottom Line

The banking and credit union sectors are at an inflection point. Sustained higher interest rates, regulatory easing, technological disruption, and shifting consumer expectations are all converging to create a fertile environment for mergers and acquisitions. For smaller institutions, consolidation offers a faster path to survival and growth, while larger players see it as an opportunity to expand their economies of scale and modernize operations.

As the year unfolds, we expect to see the financial industry experience a surge in deal-making activity, especially in the regional middle market, which will reshape the competitive landscape and redefine how banks and credit unions serve their customers.

For industry leaders, the challenge will be to execute these transactions effectively along with ongoing technology projects.

SRM has been a trusted resource in large mergers and acquisitions, assisting with everything from vendor rationalization to conversion execution. As you look toward your 2025 expansion opportunities, reach out to your SRM representative and ask how we can help with this complex process.

Keith Ash, Managing Director, brings two decades of experience in the banking industry, advising leading financial institutions with complex contract negotiations, mergers and acquisition strategies, and other strategic initiatives. Further inquiries may be made by emailing Keith at kash@srmcorp.com.