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While bank and credit union merger and acquisition activity has been on the decline, interest rate cuts and pent-up demand could see a surge of activity in the latter half of 2024 and into 2025.

U.S. banks announced 96 acquisitions in 2023 with a total deal value of $4.2 billion, according to S&P Global Market Intelligence data. That’s about half the 202 deals done in 2021.

When looking at Massachusetts credit unions, the trend holds up, as well: There have been 38 approved mergers in the state since 2018, according to credit union regulator NCUA. 2022 marked a five-year high with 10 mergers.

But in Massachusetts, the bank M&A market has heated up as in the latter half of 2024, starting with the completion of two previously announced tie-ups between Eastern Bank and Cambridge Trust, and between Abington Bank and North Shore Bank.

First, Pittsfield Cooperative Bank applied to buy Springfield-based Arrha Credit Union.

Then in the spate of few days last month, Digital Federal Credit Union announced plans to merge with First Tech Federal Credit Union and Rollstone Bank & Trust said it merge its holding company with the mutual holding company for Newburyport Bank and Pentucket Bank.

Once those mergers are consolidated, the state will have 87 FDIC-insured, independent retail banks plus 11 that share one of four mutual holding companies.

Additionally, there have been four credit union mergers in Massachusetts this year, according to the NCUA.

Consolidation Pressures Ramping Up

There is always some level of M&A activity in the banking sector, often to ensure that a skilled successor is in place to take over. Boardroom politics can also play a role according to Arthur Loomis, president of consultancy Loomis & Co.

“Historically, banks are always sold, they’re not bought,” Loomis said. “Something goes on inside the boardroom or inside the CEOs. I’ve had CEOs who have sold because they were losing credibility with their board, and rather than – in effect – be terminated, they sold so that they got their three-year change of control and moved on.”

Beyond succession planning, larger-scale institutions can help small to mid-sized financial institutions scale up their operations and deal with increasing regulatory burdens. Larger institutions can also help smaller-sized institutions with their technological needs at a time when customers demand more services.

“We typically, at our size, can invest in and buy technology services a little bit more efficiently than a smaller institution,” NBT Bank CEO Scott Kingsley said. “We can spread the cost of that technological expectation of both product and processing across a wider group of customers, across the bigger organization. That ability to be able to purchase technical resources that scale is really, really important.”

New York State-based NBT Bank announced a planned merger with Evans Bank, a community bank in upstate New York in September, and also made inroads in the Western Massachusetts market last year when it acquired Salisbury Bank.

Even as lower interest rates make bank mergers cheaper, they also reduce pressure on smaller banks to find a buyer. iStock illustration

It’s Getting Cheaper

With the Federal Reserve’s 50-basis-point interest rate cut last month and a series of 25-basis-point cuts expected over the next few quarters, banking industry leaders and experts agree some potential mergers or acquisitions could get help across the finish line.

But it could also help some banks put off finding a buyer.

“The Fed lowering rates will take pressure off of banks’ margins,” PeoplesBank CEO Tom Senecal said. “That will have a positive impact on most banks who are what we call ‘liability sensitive’ will improve their margins, so that might slow down those smaller banks who don’t have as much pressure.”

When two mutual institutions come together, such as when Holyoke-based PeoplesBank and Spencer-based Cornerstone Bank announced plans to merge in June, there are some additional financial considerations that helped slow the flow mergers in recent years, and which could open up that pipeline in the quarters ahead.

“You don’t get the benefit of combining your capital,” Senecal said. “You have to mark your balance sheet to market value. So, the marks against the market value of your loans with currently high interest rates, when most banks are carrying loans at low interest rates, reduces the value of those loans.”

That has “a significant impact” on a merger’s attractiveness when rates are high, he said, by forcing the acquiring mutual bank to raise more subordinated debt to finance the deal. But as rates fall, the effect runs in reverse, making mergers cheaper.

There may also be some pent-up demand from the overall lack of M&A activity in recent quarters.

“I do think that the last two or three years, there’s been a lot of pressure on the smaller banks relative to performance and I think some people are a little fatigued and might be a little bit tired,” said NBT’s Kingsley. “If someone can partner with a smaller bank and open up a new geography or extend the geography that they’re interested in, then I think there should be a lot of interest.”

Sam Minton

A Pause Before Combining Cultures

But these deals contain more than dollars and cents. Human beings with loyalty, emotions and bias are front and center in mergers and acquisitions. And executives interviewed for this story said that while the sector might be headed for more consolidation, banks and credit unions will be taking their time to ensure that their counterparts in any merger are the right fit.

When mergers or acquisitions occur, it can be more than a financial transaction. Employees who had previously worked for one company for years can find themselves thrown into a whole new institutional culture. Likewise, customers who are used to a certain brand or look of their bank can find themselves forced to adapt to a lot of sudden change.

“I actually think culture is the most important thing because if you have two cultures that come together and it doesn’t fit, either you have employee attrition or customer attrition,” Cambridge Savings Bank President and CEO Ryan Bailey said. “That changes not only the amount of people you keep, but also the financials of how well that transaction performs. Culture, to me, is number-one in making the appropriate acquisition. They’ve got to have the same type of risk appetite you do, same type of leadership philosophies.”

CSB’s last deal was its 2021 acquisition of Melrose Bank.

If an institution tries to force its culture on another, it can lead to long-term issues.

“If we don’t think someone’s culture will fit our operating style, we just sort of move on,” Kingsley said. “In a lot of cases that if one tries to force your culture or your behavior on somebody that you don’t think already has that, what do you get? You typically don’t get a great result. You know, people tend to leave the organization, and they find other things.”