The Consolidation Wave Banking and Credit Union Boards Are Ignoring

Key Takeaways from this Blog:

• Consolidation is accelerating fast and across all charters: 2025 saw record bank and credit union M&A, driven by unsustainable economics for subscale institutions (rising tech, regulatory, and funding costs) and a newly favorable regulatory environment, yet most community institutions aren’t preparing. 

• The gap is denial, not optimism: Experts project 4,000–5,000 institutions disappearing by 2028, but only ~10% of community banks and credit unions plan M&A, setting many up for weaker valuations and forced, reactive deals later. 

• Timing matters more than intent: Institutions that act in 2025–2026 can merge from strength while valuations and regulatory conditions are favorable; waiting risks becoming a distressed seller as fintech competition, margin compression, and consolidation intensify. 

The financial institution consolidation wave of 2025 isn't confined to one charter type. More than 150 bank deals were announced, exceeding 2024's total. October 2025 alone saw 21 bank transactions totaling $21.4 billion, the highest monthly deal value since early 2019. Fifth Third acquired Comerica for $10.9 billion. Huntington bought Cadence for $7.4 billion. Pinnacle merged with Synovus to create a $114 billion institution. Credit union M&A reached historic levels, with 22 whole-bank acquisitions proposed in 2024 alone.

Bob Diamond, through his Atlas Merchant Capital fund, predicts 3,000 US banks will disappear in the next two to three years. Add credit union consolidation trends, and the total financial institution count could decline by 4,000 to 5,000 by 2028. Industry analysts describe this as watching "the middle disappear," with massive national players on one end and niche community institutions on the other, while regional institutions get consolidated at a rapid pace.

Yet when community bank CEOs were surveyed about their 2025 plans, only 10% said their bank was planning a merger. Credit union boards show similar patterns, with most not actively preparing for strategic alternatives.

That gap between what industry experts project and what boards are preparing for isn't optimism. It's denial. And it's setting up stakeholders for strategic whiplash when the consolidation wave hits institutions that assumed they could wait it out.

The Math That Forces Consolidation

The US financial services industry remains remarkably fragmented: more than 4,500 banks and approximately 4,800 credit unions. Bank numbers have declined from approximately 8,500 at the start of 2008, but the pace has been slowing. The intercompany merger rate has averaged 2.5% annually since 1980.

So why is Bob Diamond predicting such dramatic consolidation? Because the economic forces intensified in 2025, while regulatory resistance diminished. And these forces affect all deposit-taking institutions.

Technology costs are rising 10% annually. Over the past 15 years, financial institutions increased technology spending by approximately 65%. As of 2023, the largest institutions' technology budgets were more than 10 times those of regional players, and this differential continues widening. Community institutions face the same customer expectations for sophisticated digital banking, mobile apps, AI-powered features, and cybersecurity that mega-institutions can afford. But they're funding it on a fraction of the asset base.

Customers don't adjust their expectations based on institution size or charter. They expect the mobile banking experience from a $500 million community institution to match what they get from Chase or Bank of America. Institutions that fall behind lose existing relationships to competitors with superior digital capabilities.

Regulatory costs present similar challenges. Compliance programs, risk management frameworks, BSA/AML requirements, and supervisory expectations don't scale down proportionally. A $500 million institution and a $5 billion institution need many of the same compliance functions, but one has ten times the assets to absorb those costs.

Add sticky funding costs. For banks, average cost of interest-bearing deposits remains around 2.09%, more than double pre-2022 levels, and barely budging despite Fed rate cuts. Credit unions face parallel pressures on dividend rates. Institutions that competed aggressively for deposits in 2023-2024 locked in funding costs at the peak. Those don't reprice down just because the Fed cut 75 basis points. Meanwhile, net interest margins are compressing toward 3%.

The economics are unsustainable at subscale. And subscale increasingly means anything under $10 billion in assets.

This is current financial reality creating immediate imperatives. Institutions operating with 3% net interest margins, rising technology costs, fixed regulatory expenses, and elevated funding costs face a straightforward question: how long can we maintain profitability without achieving greater scale?

For many, the honest answer is measured in quarters, not decades.

The Regulatory Green Light

For years, financial institution M&A faced significant headwinds. The Biden administration's July 2021 executive order on mergers signaled heightened scrutiny. The OCC, FDIC, and DOJ announced revised merger policies in September 2024 that increased approval uncertainty and extended review timelines. Some institutions simply abandoned acquisition plans.

That environment reversed sharply in 2025.

Consensus is forming among regulators that consolidation can result in a stronger, more efficient industry. Regulators approved major transactions at speeds not seen in years. Deals that historically took 8 to 11 months were approved in 4 to 5 months. The Capital One acquisition of Discover completed in May 2025. Major regional transactions moved through approval processes with newfound efficiency.

The message from Washington became clear: if the economics make sense, the combined institution is well-capitalized, and you can demonstrate public benefit, we're not standing in your way.

Acting FDIC Chair Travis Hill stated that new bank formation had "fallen off a cliff" and should be encouraged. Comptroller Jonathan Gould called the 2025 charter application surge a "return to the norm." The OCC received 14 de novo charter applications in 2025, nearly matching the total from the prior four years combined.

For executives and boards, this created a narrow but significant window. The 2025-2026 period is widely seen as favorable for pursuing mergers. By 2027-2028, election dynamics will introduce uncertainty. Political headwinds could return. The regulatory climate could shift.

Smart institutions understand this timing. They're accelerating due diligence, lining up financing, and positioning themselves to announce deals while conditions remain favorable. Investment bankers report deal pipelines are crowded, with boards receiving unsolicited offers and institutions actively scouting acquisition targets.

The Fintech Charter Wave Accelerates the Timeline

QED Investors and Oliver Wyman warned in their October 2025 analysis that fintechs obtaining full-service charters could reach the top 50 banks by assets by 2028 to 2030. They're not talking about fintechs displacing JPMorgan Chase. They're talking about fintechs displacing subscale regionals and large community institutions that competed on price rather than relationships.

This threat affects banks and credit unions equally. Mercury, PayPal, and SoFi aren't distinguishing between charter types when they compete for small business deposits and consumer relationships. They're competing against all deposit-taking institutions with their 170-to-187-basis-point cost-of-funds advantages and digital-native infrastructure.

This creates urgency for M&A in two distinct ways.

First, it reduces the universe of attractive acquisition targets. Institutions that lose deposit share to fintech competitors, that face margin compression from structural cost disadvantages, that see partnership revenue disappear as fintechs internalize banking capabilities become progressively less attractive. Their valuations compress. Their positioning weakens. Acquirers who would have paid premiums in 2024 start looking elsewhere in 2026.

The optimal time to pursue M&A is while your institution still commands attractive valuations and possesses negotiating leverage. Waiting until market pressures have weakened your position means negotiating from deteriorating strength. The difference between selling when you're performing well versus after several quarters of compressed margins can be measured in tens of millions of dollars of member equity or shareholder value.

Second, the fintech charter wave forces institutions to achieve scale before competitive dynamics change permanently. If Mercury, PayPal, SoFi, and others are operating as fully-chartered banks by late 2026 and 2027, the competitive landscape transforms. These aren't speculative startups. They're well-capitalized, deposit-funded, digitally-native banks with structural cost advantages. Institutions that wait will be competing against these entities while simultaneously trying to negotiate merger terms from weakened positions.

The choice is clear: merge now while you have leverage, or wait until competitive forces make you a distressed seller.

Most institutions are choosing to wait. That's not a strategy. That's hoping the problem solves itself.

The Survey Says One Thing, The Data Says Another

According to S&P Global Market Intelligence's Q4 2024 survey, 41.6% of bankers said their institution was likely to pursue an acquisition over the next 12 months, up substantially from 33.3% in Q3. Meanwhile, only 10.9% thought their institution was likely to sell.

But when community bank CEOs specifically were asked about their 2025 plans, only 10% said their bank was planning a merger. Credit union boards show similar patterns.

The disconnect is striking. Larger regionals are aggressively pursuing scale. Yet community institutions, most vulnerable to economic consolidation pressures, are planning to stay independent.

Engage fi's analysis of financial institution consolidation patterns across more than 4,400 credit unions validates what broader industry data shows: institutions facing acquisition pressure exhibit consistent warning signs well before deals are announced. Analysis of 2025 announced M&A transactions reveals that acquired institutions are approximately 2.4 times more likely to have exhibited financial stress indicators before the deal compared to the overall industry. Yet most boards don't conduct rigorous assessments of whether their institution's financial trends place them in the acquisition-likely category.

This pattern mirrors previous consolidation waves. Companies that waited too long discovered their valuations had compressed, their options had narrowed, and their leverage had evaporated. By the time boards acknowledged M&A was necessary, they were accepting offers well below what they could have commanded 12 to 18 months earlier.

The consolidation wave isn't respecting charter boundaries. Credit unions are aggressively pursuing bank acquisitions. Total target assets of banks selling to credit unions hit the highest yearly point ever in 2024. But this isn't opportunistic bottom-feeding. Credit unions most likely to acquire are fundamentally strong: net worth ratios above 10%, ROA exceeding 0.75%, efficiency ratios below 80%, and assets typically above $250 million. These aren't stretched institutions taking on risk. They're well-capitalized institutions pursuing scale.

They're competing for the same targets bank acquirers are evaluating. Banks are likewise evaluating credit union opportunities where regulations permit. For struggling community institutions, this means more potential buyers but also more performance scrutiny. Well-capitalized acquirers are selectively targeting institutions that add value without adding operational problems or credit risk.

The uncomfortable question: If only 10% of community institutions are actively planning M&A, but experts predict 4,000 to 5,000 institutions disappearing in 2 to 3 years, where's the disconnect? Either the experts are spectacularly wrong, or 90% of institutions are severely underestimating the forces they face.

The evidence overwhelmingly suggests the latter.

Who Gets Acquired and When

The consolidation wave will follow predictable patterns. Boards should assess honestly where their institution falls in this spectrum.

The institutions most vulnerable share predictable characteristics. These aren't institutions experiencing temporary margin compression. They're structurally unprofitable and shrinking. The patterns are consistent: efficiency ratios exceeding 100%, negative ROA, declining deposit or share growth, contracting customer bases, and multi-year asset declines. The difference between institutions that survive independently and those that get acquired shows up clearly in the fundamentals.

First-wave targets in 2026-2027 will be institutions with $1 to $3 billion in assets lacking clear differentiation. These institutions are large enough to be operationally complex but too small to achieve meaningful scale economies. They face the full burden of regulatory compliance and technology investment without the asset base to absorb those costs efficiently. If they competed primarily on rates during 2023-2024, they're now stuck with funding costs that won't decline proportionally with Fed rate cuts.

Institutions with high CRE concentrations face additional stress. Banks with $5 to $15 billion in assets are the most concentrated in CRE according to Fitch Ratings. Urban institutions face more pressure than rural ones because they tend to have more exposure to struggling office markets rather than owner-occupied commercial real estate. With approximately $957 billion in CRE loans maturing in 2025 (nearly triple the historical average), institutions with significant CRE concentrations are navigating a refinancing wave while funding costs remain elevated.

Community institutions in markets where larger regionals are aggressively expanding face immediate threats. Texas, Florida, and the Southeast have become M&A hotbeds as super-regionals build market presence. Fifth Third's acquisition gives immediate Texas scale with plans to build an additional 150 branches. Huntington's purchase extends reach to 21 states. PNC's deal makes it the dominant Denver bank. These are offensive moves to establish commanding positions before fintech competition intensifies.

Institutions dependent on partnership revenue that's evaporating as partners pursue their own charters face both margin compression and confusion. The revenue stream they counted on is disappearing faster than anticipated.

Second-wave targets in 2027-2028 will include institutions with $3 to $10 billion in assets that remain subscale despite their size. Regionals approaching but below $100 billion may seek merger partners to cross that threshold. Institutions in consolidating markets where competitors achieved superior scale through earlier acquisitions will find themselves at increasing disadvantages. Institutions with lackluster financial performance and activist pressure will face mounting demands to pursue alternatives.

Some institutions will likely remain independent. Those under $500 million with strong niche positioning and genuine local market dominance can maintain independence if they've built defensible advantages. Institutions above $10 billion with clear strategies, adequate technology investment, and strong financial performance have the scale to remain viable. Community institutions with measurable relationship advantages that translate into pricing premiums and superior deposit retention can justify independence even at smaller asset sizes.

But most institutions that believe they'll remain independent are overestimating their positioning. They're assuming relationships are stickier than they are. They're underestimating how quickly technology gaps become disadvantages. They're hoping funding costs normalize faster than economics suggest.

While most acquisition targets are smaller institutions, the watchlist includes some surprisingly large players. Institutions with $4 to $10 billion in assets showing stressed trend lines aren't immune from acquisition pressure. Size alone doesn't guarantee independence. Performance does.

Regional acquirers are building what analysts describe as "patchworks of strongholds in strategic markets." They're selectively adding scale in high-growth markets while avoiding institutions with weak positioning or problematic portfolios.

Community institutions aren't driving this consolidation wave. They're targets of it.

The Buyer Bench Is Deep and Well-Capitalized

The acquirers driving this wave aren't overleveraged institutions taking on excessive risk. Analysis reveals strong fundamentals: net worth ratios above 10%, ROA consistently above 0.75%, efficiency ratios below 80%, and conservative loan-to-deposit or loan-to-share ratios. These institutions have the capital, the earnings capacity, and the operational discipline to pursue acquisitions.

The buyer bench isn't limited to mega-institutions. Well-managed institutions in the $250 million to $5 billion asset range represent a deep pool of potential acquirers. These regional and community institutions have the scale to absorb smaller players, the operational sophistication to execute integrations, and the motivation to build market dominance before larger competitors or newly-chartered fintechs move in.

For boards of potentially vulnerable institutions, this means the buyer pool is both deep and discerning. Acquirers have options. They're not desperate. They're selectively targeting institutions that add value. Institutions that wait until their financials have deteriorated will discover that buyer interest has evaporated.

The cross-charter competition is real. Credit unions with strong fundamentals are competing with banks to acquire struggling community banks. Well-capitalized banks are evaluating credit union opportunities where regulatory paths exist. The acquirer that offers the most attractive terms, the smoothest integration, and the most credible vision will win deals, regardless of charter type.

The Board Questions Nobody's Asking

If your board hasn't had serious M&A discussions in 2025, you're already behind institutions approaching consolidation strategically.

Here are the questions financial institution boards should ask in Q1 2026:

On valuation: What is our current market valuation or member equity position relative to peers? How does that compare to recent M&A transactions in our asset class? If we're trading below recent deal multiples, why? If we're above them, how long will that premium last if performance deteriorates?

On positioning: Can we articulate a clear path to sustainable competitive advantage that justifies remaining independent? Is that path based on genuine differentiation we're actively delivering and can measure through customer retention and pricing power? Or is it based on assumptions about customer inertia and market stability that may not hold under stress?

On timing: Do we believe the current regulatory environment favoring consolidation will persist indefinitely? If not, what's our plan if the approval climate becomes more restrictive in 2027-2028? Are we prepared to move quickly if attractive opportunities emerge?

On technology and scale: What percentage of our annual budget goes to technology investment? How does that compare to institutions two to three times our asset size? Can we realistically match customer expectations for digital banking, AI-powered features, fraud prevention, and cybersecurity on our current budget?

On deposits: What percentage of our deposits or shares are genuinely relationship-driven versus rate-sensitive? Can we measure that distinction, or are we assuming relationships exist based on tenure rather than loyalty? If funding costs stay elevated while margins compress further, at what point does our business model become economically untenable?

On preparation: Are we prepared for unsolicited acquisition offers or merger discussions? Have we established clear criteria for evaluating proposals? Do we have relationships with investment bankers, consultants, or legal advisors who can help us assess offers quickly and negotiate from strength?

The choice is straightforward but uncomfortable: be proactive about M&A while valuations remain favorable and leverage exists, or be reactive after performance has already weakened your position.

Most boards are choosing reactive by default. They're not explicitly deciding to wait. They're just not deciding, which amounts to the same outcome.

The Window Won't Stay Open

The 2025-2026 period represents a unique convergence: regulatory receptivity to consolidation, recovering valuations after the 2023 regional bank crisis, relatively stable economic conditions despite margin pressure, and fintech competition still in the early stages of charter implementation.

By 2027-2028, several factors could significantly constrain M&A activity and valuations. Election dynamics will introduce regulatory uncertainty. Fintech-chartered banks will be operating at scale, taking deposit share. Valuations may compress for institutions that haven't achieved defensible positioning or addressed technology gaps. Activist stakeholders will increasingly pressure underperforming boards to pursue alternatives at whatever terms the market will bear.

Oliver Wyman notes that the top 20 US banks had excess capital exceeding $250 billion through the first half of 2025. That capital will be deployed. Well-capitalized credit unions are likewise seeking acquisition opportunities.

The boards and management teams that understand this timing are preparing now. They're conducting reviews that honestly assess competitive positioning and independence sustainability. They're engaging with investment bankers or M&A advisors to understand current valuations and buyer interest. They're stress-testing their independence assumptions against realistic scenarios. They're ensuring their institutions are positioned to evaluate inbound interest from strength rather than desperation.

The institutions that aren't preparing are making an implicit bet that 90% of industry experts are wrong. That Bob Diamond is wrong about 3,000 banks disappearing. That Oliver Wyman is wrong about seven new megabanks emerging. That credit union consolidation trends won't accelerate. That the economic forces driving consolidation will somehow dissipate.

That's not a bet most boards should make with member equity or shareholder capital. But it's the bet that 90% of community institutions are currently making through inaction.

What Happens Next

Bob Diamond predicts 3,000 US banks will disappear in the next two to three years. Credit union consolidation trends suggest hundreds more will merge or be acquired. Combined, 4,000 to 5,000 financial institutions could exit the market by 2028. Oliver Wyman projects up to seven new megabanks with more than $1 trillion in assets. More than 150 bank deals were announced in 2025. Credit union M&A reached record levels. Major transactions are being approved in four to five months rather than eight to eleven.

Yet only 10% of community bank CEOs and a similar percentage of credit union boards say they're actively planning for M&A.

Either the experts are spectacularly wrong, or 90% of community institutions are severely unprepared. The evidence overwhelmingly suggests the latter. Technology costs are rising 10% annually. Regulatory costs don't scale down. Funding costs remain elevated. Net interest margins are compressing toward 3%. Fintech charters are creating competitors with 170-to-187-basis-point funding advantages. The economic case for consolidation isn't theoretical. It's mathematical.

Financial institutions face a binary choice: approach M&A strategically while they still possess leverage, or wait until market forces drive reactive decisions from weakened positions.

When Bob Diamond says 3,000 banks will disappear and industry analysts predict 4,000 to 5,000 total institutions will consolidate, whose institution do they think that includes?

It's unlikely they're wrong about the numbers. The only question is which 4,000 to 5,000 institutions make that list. Boards that assume their institution isn't on it without rigorous assessment are confusing hope with strategy.

The institutions that survive and thrive will be the ones whose boards asked uncomfortable questions early, made decisions proactively, and positioned themselves for success regardless of whether that came through independence or combination.

The institutions that don't will be explaining to stakeholders in 2027 and 2028 why they waited, why the terms they're receiving are so much less favorable than they could have been, and why they didn't see this coming.

The window is open. The clock is running. And hoping the consolidation wave doesn't reach your institution isn't a plan. It's a prayer.