With conditions for bank combinations improving, and financial pressures on smaller banks not letting up, teaming up could help smaller lenders hold their own. iStock illustration

With the Federal Reserve expected to dramatically slow its pace of rate cuts, top Massachusetts bankers say they anticipate more consolidation this year.

Research from American Banker and Bain & Company shows that M&A activity is expected to increase.

Twenty-five percent of the 212 bank, fintech and credit union executives the magazine surveyed expect their firm to merge with another financial institution within the next year.

Bain & Company research reports that the number of banks open to acquiring or actively pursuing acquisitions jumped almost threefold among the top 50 U.S. banks in 2024, year-on-year.

“I do think that you’re going to see more M&A activity,” said PeoplesBank CEO Tom Senecal. “I think there’s pressure coming from a lot of different directions on smaller institutions, pushing them towards scalability.”

Smaller Banks Facing Bigger Pressures

The Federal Reserve’s interest rate policy has increased margin pressures, Senecal said, and larger institutions are able to better absorb ongoing compliance, technology and labor costs.

Progress in unwinding bad commercial real estate loans, plus the new Trump administration, could open doors to new deals, said Rockland Trust CEO Jeffrey Tengel.

“I think one of the things that was putting a bit of a damper on M&A was a bit of a commercial real estate overhang in office in particular and I think there’s also a perception that the regulatory environment is going to be a bit more accommodating for M&A,” he said.

With M&A activity expected to increase, Metro Credit Union President and CEO Robert Cashman noted that he expects out-of-market institutions, as well as local brands, to strike deals in 2025.

“It will be not only local institutions coming together, which makes sense, but at the same time, you’re going to see organizations from outside of our geographic area wanting to come into the local Massachusetts area and, as such, you can see some new players entering into the marketplace,” he said.

With more financial institutions entering the market as well as the proliferation of sophisticated digital banking products, the battle to be seen as relevant can also drive a bank to merge or sell itself.

“The other force that’s at play is really relevancy,” said Matt Sosik, chairman and CEO of Hometown Financial Group. “The market for banks in general has changed so dramatically from a consumer perspective. Their predisposition, especially younger folks 30 and under, to use alternative banking modes – that’s been problematic.”

Scale Brings Opportunities

The ability to cut costs and increase efficiency can make a merger attractive when banks are under financial pressure. But, as in Rockland Trust’s recent acquisition of Enterprise Bank, scale – the ability to provide more products to a new customer base – can be just as attractive.

“We have a pretty robust credit management product suite. We have a very good mortgage offering. We think all those will be added to the Enterprise Bank customers with a very robust wealth management offering, with a very broad product set – much broader than Enterprise Bank,” Tengel said. “So, the idea that we can introduce a lot of those products and services into a customer base that doesn’t currently have them, I think that’s one of the keys.”

When PeoplesBank completed its merger with Cornerstone Bank earlier this month, bank executives immediately saw compliance and efficiency benefits.

“The immediate benefit is things such as compliance, risk oversight, internal audit, those are all functions that we’ve already started to move on,” Senecal said. “Cornerstone had some retirements in a senior-level position in compliance and we’re not going to fill those senior-level positions. We’re going to share the senior-level position amongst the two institutions and create strategy and some of the higher-level decision making in a shared-services division. So, we’re immediately seeing the savings on just those four areas.”

 Growth Challenges Local Ties

But with M&A comes the reality that smaller, local financial institutions are sometimes absorbed into larger, sometimes not-local brands.

As PeoplesBank has grown into a $6 billion-asset lender, one of the more difficult challenges that the bank faces is maintaining its community feel, Senecal said.

“I do believe it is a challenge, because community banking is a touch and feel,” he said. “It’s the president sitting in the corner office, when you walk in the lobby you have access to them. It’s very different than the regulatory environment that when you grow up, you have to abide by newer regulatory rules. Customers don’t always understand that. Decision-making can sometimes be disjointed at larger institutions and I think that decision-making, we’ve tried really hard at keeping the same decision-making process.”

For a much larger bank like $19.42 billion-asset Rockland Trust, part of maintaining that “community feel” after its planned acquisition of $4.7 billion-asset Enterprise Bank will entail maintaining the branches that Enterprise operates instead of closing them.

“All those branches, they feel very community anchored,” Tengel said. And when I say that, I’m not talking about the broad – all 27 branches – but community by community. It’s like a microscopic part of the whole that gets knitted together.”

Tengel also highlighted how important it is for the acquirer or to be an active in their new market.

“The key to making that work is being visible in the community, being present, being active, being engaged with all the different community participants,” he said. “We do that really well, and so does Enterprise, so I think by getting bigger, it doesn’t necessarily mean that we’re kind of turning away from that community bank look and feel because that’s how we do business. We don’t know any other way.”

Sam Minton

A Lifeline for Community Banks?

While some might characterize mergers and acquisitions as the opposite of community bank behavior, Sosik believes it is actually what could keep smaller banks alive.

“I think [community banking is] very much imprinted in sort of who we are in the United States. I don’t think we’re going to lose that and in the end, I think the path towards preserving community banking and its impact on our communities is logically through making sure that the community banking industry is healthy financially. I think you’re going to see M&A that supports the industry, ensures that financial viability.”

But while there are still thousands of banks in the United States, this is a rapid decrease compared to the 14,376 commercial banks the country had in 1984, according to the Federal Reserve Bank of Kansas City.

Ultimately, said Senecal, consumers will determine if community banking is able to survive.

“So as long as the consumer feels that they will support a community bank regardless of the experience, yeah, there’s a place,” he said. “In my opinion, I don’t see it happening. I just don’t see it happening from a competition level, with the internet, with digital technology.”