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 by the end of last year, the number had dropped to 72,500, which is quite high,” said Ajay Samant, dean of the College. of Business from Illinois State University.
The big banks continue to grow through acquisitions, and there is some consolidation among the smaller banks. But the number of medium-sized banks is decreasing.
“The medium-sized entity faces competition at two different levels,” Samant said. “Big banks benefit from what I would call economies of scale. You have banking services for literally millions of customers. This helps lower the average cost per transaction.
“From the point of view of what I would call price competitiveness, it is very difficult for medium-sized banks to compete with mega banks. On the other hand, the personalized service that small banks, regional banks have to offering is very difficult to replicate on a larger scale, which also hurts mid-sized banks.
This is not the first time that Heartland Bank has taken over a small institution. During the Great Recession, Heartland took over assets seized by the federal government from the bankrupt Bank of Illinois. At some point, Heartland might itself become a takeover target, as bigger fish eat bigger fish. But Samant said with combined assets of $5.1 billion, Heartland Bank’s merger with Town and Country is still at the lower end of the scale. He defines the midstream segment as a $10 billion to $250 billion asset, adding that the trend will continue for the foreseeable future.
“On one side we would have big banks, like 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 there will be smaller banks, which will respond to regional needs, continuing to provide the type of service that their customers demand, which is face-to-face service,” Samant said.
He warned that total assets are not the only metric by which big banks are targeting smaller ones for a takeover.
“A behemoth would swallow a small bank, only if the small bank’s portfolio of assets is attractive. If the small bank has loans that look strong and it has a good customer base, it will continue to grow. That makes small bank a good acquisition target. So it’s almost like success puts you at risk,” Samant said.
In a news release about the merger, Heartland noted that Town and Country Bank’s markets in the southern Illinois metro area in Quincy and Springfield complement Heartland’s service area. Town and Country’s loan book is also attractive based on Heartland’s assessment that the merger will be earnings accretive by 17% per share, excluding merger costs.
“That sounds like an acceptable rate of return. When the giants are looking for smaller banks to acquire, it is returns of around this magnitude that would draw attention to corporate acquisition,” Samant said.
The trend accelerated during and after the pandemic due to wider adoption of technological innovation in banking as a means of coping with physical shutdowns.
“What could have taken 10 years in technology has been accelerated in about a year and a half. Bank customers have become much more receptive to technology for banking,” Samant said.
For example, Samant said electronic check deposit took off during the pandemic.
The shrinking middle tier of the banking sector is hurting people from underrepresented communities who want to take out loans to start new businesses, he said, because this type of loan carries more risk than average.
“The big banks are well equipped to do that. They have the funding. But they’re not very interested in that business segment because it’s very information-intensive in that you have to know your customers,” Samant said.
And Samant said that while smaller banks know their customers, they don’t have the resources to lend to people with little background in starting a business.
“Lending to underrepresented groups isn’t attractive to big banks because they don’t see the kind of profit margins they’re looking for. This is an activity that is better suited to small banks. Unfortunately, small banks do not always have the resources to support this. risk,” Samant said.
Branch closures have also occurred disproportionately in underserved communities or low-income areas. Samant noted that federal Community Reinvestment Act laws aimed at preventing redlining could, in part, mitigate the loss of opportunity for people in underserved communities who want 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 approximately 11% of Heartland’s shares, Heartland said in the press 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 management reshuffle.
Patrick F. Busch, executive vice president and chief loan officer, will step down at the end of the year and assume a newly created position of vice president. Busch will continue to be involved in business development, according to the press release, and will remain on the bank’s board.
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 loan officer.
“Pat Busch has been integral to 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 has played in the significant growth of the company” , said the CEO. Fred Drake. “Larry Horvath will be a strong successor to Pat as the new Chief Loan Officer and will continue the conservative credit culture that has made the company a high performing bank.”
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