Foundation of community banking is sound, says S&P expert

Not long after news of Cincinnati-based Fifth Third Bank’s intention to acquire Dallas-based Comerica Bank reached the industry, Nathan Stovall, director of FIG research at S&P Global Market Intelligence, told bankers attending Day One of the Bank Holding Company Association’s Fall Seminar that the foundations of community banking are solid and the environment is ripe for M&A activity to triple or quadruple from the meager number of deals seen in 2024. .For bankers thinking about franchise value and what had been regulatory roadblocks to consummating deals, there is good news. Cost of funds, which have been decreasing and should continue to do so, will play an outsized role in valuations, he said. “We continue to benefit from pretty steady growth and, importantly, the remixing of our balance sheets,” Stovall said. The margin bump provided by the recent drop in the Fed Funds rate supports the trend, Stovall added. “At the same time, credit remains really good.” All this adds up to a fertile environment in what remains, for now, a generally stable economy with only a handful of concerns. One of those concerns is tariffs. While corporations have mostly absorbed tariffs, it remains to be seen for how long corporate shareholders will find the reduced profits that result from holding the line on costs tolerable, Stovall said. One way corporations have been able to hold the line on pricing is by reducing labor costs. “I do worry about the labor markets slowing and higher prices,” Stovall said. As tariff uncertainty looms, he characterized consumers who may end up bearing the burden soon as “stretched but not broken.”“Consumer balance sheets are in great shape,” Stovall said. That characterization comes from looking at consumer debt and consumer savings rates. Consumer debt is holding at historical averages, Stovall said. Seventy percent of consumer debt is in mortgages, and most of that is in fixed rate mortgages, he said. Couple that with strong employment in recent years, and consumers have mostly ridden out the era of higher interest rates on solid footing. Consumers are saving money, perhaps not as much as they saved when stimulus funding was flowing in the covid era, but they are still saving. Stimulus funds were supposed to evaporate in 2022, then experts said it would be 2023, and then 2024. “It was designed as a bridge and the bridge was way longer than anybody thought,” Stovall said. “The fact is it was way longer than anybody thought and that's why the consumer has held up better than people thought.”Back to the current prospects for bank M&A, which had been dismal the past three years with rising interest rates putting some bank balance sheets underwater during what many deemed a hostile regulatory environment. Now in the third quarter of 2025, not only are the number of deals up, so are the values of those deals.Prior to the announcement by Fifth Third, the total “deal value” of bank M&A for 2025 was $16.6 billion, Stovall said. The Fifth Third buy added $10.9 billion to that sum in one day. “I think we're going to see more bigger deals, and that can impact us in a lot of ways,” he said. The fallout for smaller community banks might mean competition disappears from some markets, or opportunities to gain new customers or new employees — or new deposits — suddenly open up.“We still think deposits are the true value of a franchise,” Stovall said. Banks with lower costs of funds are being rewarded in their valuations, sometimes by a lot. “Material declines in deposit costs should come in the next one to two quarters,” Stovall said, as CD rates reprice.And the regulatory environment has definitely shifted, even if you aren’t seeing a change during the exam phase. “This administration has been very supportive of transactions,” Stovall said, recounting a conversation he had with Travis Hill, acting chair of the FDIC. Paraphrasing, Stovall said Hill told him: “If you don’t hear from us in two months, we think the deal should just be approved.”