Senior analyst Anand Chokkavelu explains how he was happily surprised by a 16% pop in the shares of central New York community bank Alliance Financial on Monday. 

It's slated to be bought by NBT Bancorp in an all-stock deal (2.1779 shares of NBT for each share of Alliance), but the interesting thing for non-Alliance bank shareholders is the potential consolidation in the industry.

With about 7,200 FDIC-insured banks in the U.S. (hundreds of them public), there's a lot of room for mergers. While Anand doesn't think it's a good idea to buy a bank hoping to win the buyout lottery, buying smaller, undervalued banks occasionally pays off this way. This happened to be true for Alliance, but the shares he owns in small banks BancFirst (NASDAQ:BANF)

Some of the best opportunities over the next few years can be found in small, under-the-radar banks. One of them is featured in our report "The Stocks Only the Smartest Investors Are Buying." You can learn about it, and more, in our exclusive free report. Just click here to keep reading