When the coronavirus pandemic hit the economy around March, most banks put mergers and acquisitions (M&A) on hold. After all, they had to deal with their existing customers and credit quality, make loan deferrals, and grant loans through the Paycheck Protection Program. However, as the year has progressed and banks have gotten a better handle on economic conditions, M&A activity has started to bounce back.

First Citizens BancShares (NASDAQ:FCNCA) recently merged with CIT Group (NYSE:CIT) in the largest bank deal of the year, creating a bank with more than $100 billion in assets. And there has been more chatter from bank CEOs about starting to look at M&A again, especially as digital adoption and the pandemic have made the industry even more ripe for consolidation than it already was.

Now, the big question is when will the sellers be ready to raise their hands.

Silhouettes of two businessmen shaking hands.

Image source: Getty Images.

Signals of interest

When a big event like the pandemic hammers the banking industry, the banks that can operate from a position of strength and have higher tangible book values are going to be thinking opportunistically. That's because stocks rarely will move downward as much as they have this year, so it gives potential buyers a rare opportunity to pay less of a premium for an acquisition target.

We saw this play out early in the pandemic, most notably when PNC Financial Services Group (NYSE:PNC) sold its large stake in asset management firm BlackRock (NYSE:BLK) for the express purpose of getting ready to move quickly if the right acquisition candidate came along. At the same time, PNC CEO Bill Demchak also said the bank is going to be patient. After all, large acquisitions can take time, given the complexity of some of these institutions.

A good place to look for hints of M&A is in the community and regional banking sector, where banks were making multiple acquisitions a year before the pandemic. In some cases, smaller banks use M&A as more of a growth strategy over organic growth. Additionally, lots of small banks have been choosing to sell themselves in recent years because of fierce competition, burdensome regulation, a lack of technology, and the need for scale to really succeed.

My home state of Massachusetts is a good place to look. First of all, it's heavily banked, with 108 state-chartered banks, according to the Federal Deposit Insurance Corp. Second, consolidation has already been occurring there for the past few years -- five years ago, Massachusetts had 142 state-chartered banks. 

In the third quarter, the roughly $14 billion asset Eastern Bankshares (NASDAQ: EBC) completed a $1.8 billion IPO, saying it would use the proceeds to be opportunistic about acquisitions. Chris Oddleifson, CEO of the roughly $13 billion asset Independent Bank Corp. (NASDAQ:INDB) -- which likes to do an acquisition every few years and was trading around 175% of tangible book value on Tuesday -- said he would definitely engage in M&A talks if there were an opportunity. He added that despite the uncertainty, he would be unwilling to pass up a good acquisition right now. 

It takes two

But as the saying goes, "banks are sold, not bought," meaning an acquisition target typically has to want to be acquired. While the low valuations look great to the buyers, they obviously aren't so appetizing to the sellers. Mark Tryniski, president and CEO of the roughly $13 billion asset Community Bank System (NYSE:CBU) based in upstate New York, put it succinctly on the bank's third-quarter earnings call: "If your stock is selling at $20 now and the beginning of the year it was $40, it's hard to sell for $25."

Despite the uncertainty ahead, I am sure a lot of bankers have confidence that their stock prices will pick up. There is still a good chance that a second round of stimulus is coming, and if the economy fares better than expected over the winter, or an effective coronavirus vaccine comes out, the sector has a lot of upside, so it's probably worth it to most bank CEOs to wait a few months.

Don't worry, the wave is coming

While it may not happen this winter, the wave is certainly coming. A recent research report by investment management firm FJ Capital Management, which invests in a lot of banks, said the recent uptick in bank M&A continues to support the firm's belief that M&A will continue to grow in 2021. Ultimately, the total number of banks in the U.S. could decline by 50% over the next 10 to 15 years, FJ Capital said.

So, before M&A really starts to pick up, expect to see bank valuations go up as credit quality and the economic outlook improves. There will be plenty of opportunity for acquirers to purchase banks at good prices because even when credit issues clear, banks are still going to be challenged by the low-rate environment, especially if loan demand doesn't pick up. This will continue to make revenue generation difficult, making more sellers more likely to consider M&A. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.