While some question, or even downplay the idea, the banking industry stands at the cusp of an influx in merger and acquisition activity, particularly among strong midsize banks. These midsize players will be seeking to increase geographic coverage and diversification and to acquire deposits with little to no premium. They will also acquire banks and loans as a means to minimize competition over the same clientele in the market for loans of the same structure, term and interest rate.

While the larger banks appear to be eyeing business line acquisitions rather than whole banks, small community banks will be forced to specialize or grow to become competitive or to remain independent. However, due to their small size and scant resources, they will not likely be significant purchasers in the near future. They simply can't afford to acquire their neighbors or have proven unable to overcome the social issues associated with a "merger of equals."

Many community banks continue to struggle with legacy assets, and nearly all are strapped by the weight of regulations and the significant costs that are required to abide by them. Additionally, many have loan portfolios full of loan types undesirable to midsize or large banks. While consolidation would give small community banks a better position in the marketplace, these institutions will not sit at the M&A negotiation table anytime soon as buyers. And if they do make it to the table, many lack the internal or financial resources necessary to finalize a transaction.

This dynamic leaves the midsize players as the primary contenders for the consolidation and acquisition activity, which has commenced and, by most industry forecasters' expectations, will continue to heat up over the next few years. Approximately 7,200 banks are in existence in the U.S. today, and that number will likely be reduced dramatically when the surge in M&A is complete.

The midsize banks actively pursuing acquisitions today cite both attractive pricing and good currency relative to their targets as driving factors in their efforts. Most seek to grow market share among business clientele and increase lending opportunities across their state-to-state regional footprint. Those with capital have already begun to explore opportunities and have commenced negotiations. 

"Capital and the access to capital will be a key differentiator for those banks who will emerge as the winners in the next phase of industry consolidation" said Steve Reed, principal at BankCap Partners, a private-equity firm focused on investments in the banking industry.  

Today, midsize banks understand the business of banking includes acquisition and combination. Those bankers with the ability to successfully overcome obstacles, transact and integrate will be the ones who survive and succeed during this period of pending consolidation.

Pat Jackson is the founder and chief executive of Sabal Financial Group, an advisor and M&A specialist serving commercial and investment banks. He may be reached at pat.jackson@sabalfin.com.