The FDIC has made a U-turn on its bank merger policy. Find out why this decision is causing a stir in the banking world.

FDIC plans to rescind 2024 merger policy statement. The policy added uncertainty to the merger application process. American Bankers Association supports the FDIC's move.

Late last summer, the FDIC was moving forward on stricter rules on bank mergers and acquisitions, but the regulator is now signaling a big change in direction. Travis Hill, appointed acting chairman of the Federal Deposit Insurance Corp. in January, and the FDIC board aim to rescind the 2024 merger policy statement that frustrated the banking sector and its advocates. That means going back to the prior policy as an interim measure while the regulator conducts a broader reevaluation of its bank merger review process. The FDIC said it is pursuing this action in light of concerns that implementing it has added considerable uncertainty to the merger application process.

The FDIC had updated its policy on M&A last September, and many were concerned that it would hamper deals due to additional scrutiny and likely reduce activity for banks of all sizes.

Rob Nichols, president and CEO of the American Bankers Association, said ABA, which represents the nation's $24.1 trillion banking industry, welcomes the FDIC withdrawal of the M&A policy statement advanced by the agency's prior leadership.

"We applaud the decision to rescind the 2024 merger policy statement, which created more uncertainty in the marketplace for banks looking to make strategic decisions about their future," Nichols said in a prepared statement. "We look forward to providing our perspective on what a rational merger review process should look like in the future, as we also encourage policymakers to make it easier for entrepreneurs to launch new banks, so we can ensure the U.S. continues to have the deepest and most competitive banking system in the world."

The volume of bank-to-bank merger applications processed by the FDIC nationwide has ranged between 49 and 152 annually from 2004 through 2023, with a low of 49 occurring in 2023. The high point was in 2012.

That's not to say there hasn't been recent M&A activity involving some among the 15 biggest banks in southwestern Pennsylvania. WesBanco, the Wheeling, West Virginia-based financial institution that ranks No. 12 in the Pittsburgh metro, just closed its acquisition of Premier Financial of Defiance, Ohio. Two others that impact the Pittsburgh region were announced in late 2024, First Commonwealth Financial Corp., No. 9, is buying Cincinnati-based CenterGroup Financial, and Northwest Bancshares, No. 15, is acquiring Penns Woods Bancorp, based in Williamsport.

The FDIC last week released its fourth-quarter 2024 report that indicated Pennsylvania's smallest community banks continue to struggle. Of the 120 FDIC-insured financial institutions in the state, 75 have less than $1 billion in assets. The report said 12% of these small banks were unprofitable. That compares with 10.1% at the end of 2023 and 2.4% in 2022.

Robert Wagner, principal of Pittsburgh-based Three Rivers Fund Advisors, said regulatory and technology demands have increased dramatically during the past 15 years, hampering the profitability of small banks. He believes those under $1 billion in assets will need to consolidate to justify their existence, via mergers of equals or acquisition by bigger banks.

"A community bank these days really needs to be over $1 billion in assets to be soundly profitable," he said.

He also pointed to the rapid rise of credit unions buying small community banks in other parts of the country.

FDIC aims to rescind controversial bank merger policy, here's what's next

The FDIC has decided to rescind its 2024 merger policy statement, which had added uncertainty to the bank merger application process. The regulator plans to revert to the previous policy as an interim measure while conducting a broader re-evaluation of its bank merger review process. The American Bankers Association supports this move, welcoming the decision to remove uncertainty for banks looking to make strategic decisions. The volume of bank mergers has fluctuated between 49 and 152 annually from 2004 to 2023, with the highest point in 2012. Recent mergers include WesBanco's acquisition of Premier Financial and First Commonwealth Financial's purchase of CenterGroup Financial. Robert Wagner, principal of Three Rivers Fund Advisors, emphasizes the challenges faced by small banks, suggesting consolidation is necessary for profitability.