Bank M&A set to take off after Fed rate cuts; deal values soar

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Declining interest rates could put added wind in the sails of a bank merger-and-acquisition market that is already on a roll this year.

At least 85 bank M&A deals were announced through mid-September with an aggregate deal value of nearly $11 billion, according to S&P Global Market Intelligence. That put volume on pace to easily surpass last year's total of 100 deals. Already, total transaction value for 2024 more than doubled the $4.15 billion for all of last year.

High interest rates jacked up funding costs for banks and created loan-loss concerns and broad uncertainty, curbing the appetites of buyers in 2023. The Federal Reserve boosted rates to slow borrowing and tame inflation that topped 9% in 2022. Inflation is now down to 2.5%.

In mid-September, the Fed cut its benchmark rate by 50 basis points and signaled further reductions in coming months. Lower rates could gradually push deposit costs down and stimulate stronger loan demand. Reduced credit costs could also ease concerns about vulnerable borrowers defaulting on loans. These developments could bolster bank buyers' ability to assess the health of sellers. They also have boosted bank stocks, improving acquirers' collective ability to use their shares as currency to pay for deals. Sellers are more likely to enter transactions backed by strengthening stocks. 

"The decision to cut rates is not a surprise, but the 50 basis point interest rate cut is a signal to the market that the Fed feels comfortable that the declining inflationary pressures are sufficient to bring inflation closer to the target rate" of 2%, said Jeremy Swan, managing principal of CohnReznick. "This cut will spur investment in M&A activity."

Most recently, Mifflinburg Bancorp in Pennsylvania said Wednesday it struck a $34.2 million, all-stock deal to acquire in-state peer Northumberland Bancorp. The banks — both named after the cities in which they are based — billed the combination as a merger of equals.

Additionally this week, TowneBank in Suffolk, Virginia, agreed to pay $120 million in cash for in-state rival Village Bank in Midlothian, while ESL Federal Credit Union in Rochester, New York, said it planned to acquire Generations Bancorp in Seneca Falls, New York. That deal involved a cash payment of $26.2 million.

In the first half of September, Sterling Bancorp in Southfield, Michigan, said it would sell its bank to Jacksonville, Florida-based EverBank Financial for $261 million. Additionally, NBT Bancorp in Norwich, New York, said it would acquire Evans Bancorp in Williamsville, New York, for $236 million, while Camden National Corp. in Camden, Maine, said it would pay $86.6 million to buy Northway Financial in North Conway, New Hampshire.

In addition to banks as buyers, private equity firms and investor groups "have been holding their breath for months in anticipation of this decision from the Fed, and many will take advantage of this opportunity to act on deals that have been waiting to move forward," Swan said.

More acquirers could add to competition and support stronger deal pricing.

Already, updated data shows "a robust increase in value, influenced significantly by large-scale transactions, underscoring the sector's potential for transformative deals," Jonathan Froelich, who leads financial services deal advisory and strategy at KPMG, said in a report.

Winter Haven, Florida-based SouthState Corp.'s May announcement that it would pay $2 billion in stock to acquire Independent Bank Group in McKinney, Texas, is the largest bank deal to date in 2024. Kansas City-based UMB Financial's April plan to purchase Heartland Financial USA in Denver in an all-stock transaction valued at just under $2 billion is a close second.

By region, the Midwest is the most active so far this year, with at least 32 banks announcing plans to sell, the S&P Global data shows. The largest deal in the Midwest to date in 2024 was Wheeling, West Virginia-based WesBanco's July plan to acquire Premier Financial in Defiance, Ohio, in an all-stock transaction valued at $959 million.

First Busey Corp. in Champaign, Illinois, followed. It said in late August it would pay $916.8 million in stock to acquire CrossFirst Bankshares in suburban Kansas City.

Many of those sales were announced with expectations of lower rates this fall. Now that the shift in monetary policy is official, more M&A deals are likely to follow, said Mitch Berlin, Ernst & Young's Americas vice chair for strategy and transactions.

"The U.S. M&A market has arrived at an inflection point," Berlin said in an email. "While the cost of capital remains high, CEOs are going to be energized by the 50 basis points rate cut and the Fed's decision to embark on its easing cycle."

Modeling "a thesis around deals will become less volatile for dealmakers, and executing transactions is going to be much more palatable for companies," Berlin added. "Many companies we're working with possess healthy balance sheets and CEOs know that M&A remains the fastest path to transforming their companies and keeping pace with their competition."