Merger of Heartland, Town and Country banks part of a national trend
The merger of Bloomington-based Heartland Bank and Trust and Springfield-based Town and Country Bank, announced in August, is part of an ongoing national trend.
"In 2009, there were about 85,500 bank branches in the United States. And as of the end of last year, the number had shrunk to 72,500, which is pretty steep," said Ajay Samant, dean of Illinois State University's College of Business.
Large banks continue to get larger through acquisitions, and there is some consolidation among small banks. But the number of midsized banks is shrinking.
“The midsized entity is facing competition at two different levels," said Samant. "Large banks enjoy what I would call economies of scale. You have banking service for literally millions of customers. That helps to bring down the average cost per transaction.
"From the point of view of what I would call price competitiveness, it's very difficult for midsized banks to compete with the mega banks. On the other side, the personalized service that smaller banks, regional banks have to offer is very difficult to replicate on a larger scale. And that is also hurting the midsized banks.”
This is not the first time Heartland Bank has absorbed a smaller institution. During the Great Recession, Heartland took over federally-seized assets from the failed Bank of Illinois. At some point, Heartland could itself become a takeover target as big fish eat bigger ones. But Samant said at a combined $5.1 billion in assets, the Heartland Bank merger with Town and Country is still on the small end of the scale. He defines the middle segment as $10 billion to $250 billion in assets, adding the trend will continue for the foreseeable future.
“On the one hand, we would have large banks, such as JPMorgan Chase and Bank of America — huge banks, with tens of thousands of branches across the country at one end. The middle sector will be almost decimated. And there will be smaller banks, who will cater to regional needs, continuing to provide the kind of service their customers asked for, which is face-to-face service,” said Samant.
He cautioned total assets are not the sole measure by which big banks target smaller ones for takeover.
“A behemoth would swallow a smaller bank, only if the asset portfolio of the smaller bank is attractive. If the smaller bank holds loans that look like they are sound, and it looks like they have a good customer base, which will continue to grow. That makes the smaller bank a good target for acquisition. So, it's almost as if success puts you in danger,” said Samant.
In a news release about the merger, Heartland noted Town and Country Bank’s markets in the Metro-East area of southern Illinois, in Quincy, and Springfield, complements Heartland’s service area. Town and Country’s loan portfolio is likewise attractive based on Heartland’s assessment that the merger will be accretive to profits by 17% per share, excluding the costs of the merger.
“That sounds like an acceptable rate of return. When behemoths look for smaller banks to acquire, it would be returns of around that magnitude that would attract attention for corporate acquisition,” said Samant.
The trend has accelerated during and following the pandemic because of a broader adoption of technological innovation in banking services as a way to cope with brick-and-mortar shutdowns.
"What could have taken 10 years in the area of technology was accelerated into about a one-and-a-half-year period. Bank customers became much more accepting of technology for banking business," said Samant.
For example, Samant said electronic deposit of checks took off during the pandemic.
The shrinking middle tier of the banking industry hurts people from underrepresented communities who want to take out loans to start new businesses, he said, because that type of loan carries more risk than average.
"The large banks are well equipped to do this. They have the funding. But this segment of business is not very interesting to them because it is very customer intensive in that you need to know your customers," said Samant.
And Samant said while small banks know their customers, they don't have the resources needed to make loans to people with little history of starting a business.
"Lending to underrepresented groups is not attractive for large banks because they do not see the kind of profit margins that they seek. It is business that is better suited to small banks. Unfortunately, the small banks do not always have the resources to bear this risk," said Samant.
Branch closures also have happened disproportionately in underserved communities, or low-income areas. Samant noted that federal Community Reinvestment Act laws to prevent redlining could, in some part, mitigate loss of opportunity for people in underserved communities who wish to start businesses.
The Heartland Bank and Trust merger is expected to close in the first quarter of 2023. At that point, Town and County shareholders are expected to own about 11% of Heartland shares, Heartland said in the news release. The total cost of the buyout, Heartland said, is about $101.4 million, and Heartland expects to cover that through increased earnings in about two years.
On Wednesday, Heartland Bank announced a leadership shuffle.
Patrick F. Busch, executive vice president and chief lending officer, will step down at the end of the year and take a newly- created position of vice chair. Busch will continue to be involved in business development, according to the news release, and remain on the bank's board of directors.
J. Lance Carter, president and chief operating officer, will add the title of president of Heartland Bank. Executive Vice President Larry Horvath has been named chief lending officer.
“Pat Busch has been an integral part of the success of the company and Heartland Bank since 1995. On behalf of the entire company, I would like to thank him for the valuable role he’s played in the significant growth of the company,” said CEO Fred Drake. “Larry Horvath will be a strong successor to Pat as our new chief lending officer and will carry on the conservative credit culture that has resulted in the company being a high-performing bank.”