Is 2025 on track to be the biggest year for M&A activity? That’s a big topic of debate right now.
The rapid changes to U.S. policies created M&A hesitation earlier this year. However, activity has been consistently rising for the last decade, so it’s more likely we saw a temporary pause or slowdown and adjustments in pricing through the first part of 2025.
In fact, several M&A deals have been announced this year, to name a few. That includes Huntington’s acquisition of a Texas bank for nearly $2 billion, Columbia Banking System’s acquisition of Pacific Premier Bancorp for $2.04 billion, and the merger of Mechanics Bank and Homestreet, valued at over $3.3 billion (the largest deal we’ve seen so far). Additionally, Glacier Bancorp has been involved in multiple deals, including acquisitions of Bank of Idaho and Guaranty Bancshares.
The reason for this decade-long consolidation trend is persistent elevated cost of funds, inflationary pressures, and technological disruption, encouraging many banks, particularly mid-sized institutions, to reevaluate their operational strategies and consider mergers and acquisitions as a path forward.
The drive towards consolidation is multifaceted, encompassing the need for enhanced scale to manage interest rate risk, achieve cost efficiencies in the face of rising operational expenses, and make necessary investments in cutting-edge technologies. Additionally, the burgeoning costs of regulatory compliance and the imperative to strengthening market positioning in a slower-growth economy are pushing banks towards M&A activities.
Forging ahead, it is critical to understand the key drivers behind the increase in banking M&A activity, the challenges and opportunities presented by mergers, and the critical factors banks must consider as they navigate this complex landscape.
Economic drivers: The push for consolidation
The elevated cost of funds, inflationary pressures, and need for increased core deposits continue to exert significant influence on banks’ profitability and operational strategies in 2025. These economic conditions are creating a strong impetus for consolidation as institutions seek ways to survive and grow in a challenging environment.
Several factors are contributing:
High interest rates have squeezed net interest margins for many banks. While rates have begun to moderate, they remain elevated compared to historical norms. This has made it more expensive for banks to attract and retain deposits, while also potentially limiting loan demand. Mergers allow banks to achieve greater scale, potentially improving their ability to manage interest rate risk and maintain profitability.
Inflation has driven up operational costs across the board, from technology investments to employee compensation. Larger institutions can spread these costs over a broader base, achieving economies of scale that smaller banks struggle to match. M&A activity allows banks to eliminate redundancies and streamline operations, crucial for maintaining competitiveness.
The need for substantial investments in technology like digital banking platforms, cybersecurity, and data analytics has become a significant driver of consolidation. Smaller banks often lack the resources to keep pace with technological advancements, making mergers an attractive option to gain access to more sophisticated systems and capabilities.
Even if the regulatory landscape is shifting, the cost of regulatory compliance remains a significant burden, particularly for small and mid-sized institutions. Mergers can help banks reach a size where they can more efficiently absorb these costs and navigate regulatory demands.
- Talent and Succession Challenges
The aging workforce in banking, particularly at smaller institutions and in outlying areas, presents a significant consolidation driver. Many community banks face a critical shortage of next-generation leadership and struggle to attract talent outside metropolitan centers. This demographic shift threatens the preservation of institutional knowledge crucial for customer relationships and local market understanding. Mergers allow institutions to address succession gaps while creating more attractive career paths for younger professionals.
In an environment of modest economic growth, organic expansion has become more challenging. M&A offers a path for banks to quickly enter new markets, diversify their product offerings, or strengthen their position in existing markets.
What banks should consider
Despite these pressures driving consolidation, the outlook for banking remains nuanced. While larger merged entities can indeed leverage their combined size to negotiate better financing terms and achieve operational efficiencies, they also face challenges. The overall economic uncertainty, potential for continued interest rate volatility, and ongoing regulatory scrutiny all contribute to a complex landscape for M&A activity.
Furthermore, successful mergers require careful planning and execution. Cultural integration, technology system compatibility, and maintaining customer relationships are all critical factors that banks must navigate to realize the full benefits of consolidation.
As we move through the second half of 2025, it’s likely that the trend towards consolidation will continue, reshaping the banking landscape. However, each potential merger will need to be evaluated on its own merits, considering not just the economic drivers, but also the strategic fit and long-term viability of the combined entity.
There are several critical factors banks should carefully evaluate.
Due diligence is paramount – banks must conduct comprehensive evaluations to thoroughly identify potential risks and opportunities associated with any potential deal. This involves scrutinizing financial records, assessing technological capabilities, and evaluating cultural fit to gain a complete picture.
Integration planning is another crucial consideration that requires meticulous attention to detail. Successful M&A hinges on developing strategic frameworks for seamlessly merging operations, cultures, and technologies of the combining entities. This involves mapping out how systems will be integrated, how workflows will be combined, and how teams will be restructured to maximize synergies and efficiencies.
Regulatory compliance cannot be overlooked, as ensuring adherence to current banking regulations and standards is absolutely essential. Banks must carefully navigate the complex regulatory landscape, potentially engaging with multiple regulatory bodies to obtain necessary approvals. Failure to properly address compliance issues can derail even the most promising deals.
Perhaps one of the most challenging yet critical aspects of M&A is cultural unification. Blending corporate cultures requires thoughtful strategies to align visions, retain key talent, and ensure a smooth transition for employees and customers alike. Banks must develop comprehensive plans for communicating changes, addressing concerns, and fostering a shared identity and set of values for the newly combined organization. Without proper cultural integration, the full potential of a merger may never be realized.
The road ahead
The trend towards consolidation in banking shows no signs of abating in the long term. However, successful mergers are far from guaranteed. Banks must approach these initiatives with a clear strategic vision, meticulous planning, and a keen understanding of the complexities involved.
The key to success lies in thorough due diligence, careful integration planning, strict regulatory compliance, and thoughtful cultural unification. By giving careful consideration to these critical factors, banks can position themselves to navigate the intricacies of M&A and maximize the chances of successful transactions that deliver long-term value.
Amy Pierce is Founder, Bank Strategic Solutions.
