The merger of Heartland, Town and Country banks is 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 a continuing national trend.

“In 2009, there were approximately 85,500 bank branches in the United States. And by the end of last year, that number had shrunk to 72,500, which is pretty steep,” said Ajay Samant, dean of the Illinois State University College of Business.

Large banks continue to grow through acquisitions and there is some consolidation among small banks. But the number of medium-sized banks is decreasing.

“The mid-sized enterprise faces competition at two different levels,” said Samant. “The big banks enjoy what I would call economies of scale. You have banking services for literally millions of customers. This helps reduce the average cost per transaction.

“In terms of what I would call price competitiveness, it is very difficult for mid-sized banks to compete with the mega banks. On the other hand, the personalized service that smaller banks, regional banks have to offer is very difficult to replicate on a larger scale. And that also hurts mid-sized banks.”

This is not the first time Heartland Bank has absorbed a smaller institution. During the Great Recession, Heartland assumed federally seized assets from the bankrupt Bank of Illinois. At some point, Hartland could become a takeover target as big fish eat bigger. But Samant said that with combined assets of $5.1 billion, Heartland Bank’s merger with Town and Country is still on the small end of the scale. He defines the middle segment as assets of $10 billion to $250 billion, adding that the trend will continue for the foreseeable future.

“On the one hand, we’re going to 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 destroyed. And there will be smaller banks that will cater to the regional needs, continuing to provide the kind of service that their customers have asked for, which is face-to-face service,” said Samant.

He cautioned that total assets are not the only measure by which big banks target smaller ones for acquisition.

“A behemoth would only absorb a smaller bank if the smaller bank’s portfolio of assets was attractive. If the smaller bank has loans that appear to be stable and appears to have a good customer base that will continue to grow. This makes the smaller bank a good acquisition target. So, it’s almost like success puts you in danger,” said Samant.

In a news release about the merger, Heartland noted that Town and Country Bank’s Metro-East markets in southern Illinois, in Quincy and Springfield, complement Heartland’s service area. Town and Country’s credit portfolio is also attractive based on Heartland’s estimate that the merger would add 17% to earnings per share, excluding merger costs.

“That sounds like a reasonable rate of return. When giants are looking for smaller banks to acquire, a return of around that size would attract corporate acquisition attention,” said Samant.

The trend accelerated during and after the pandemic due to the wider adoption of technological innovation in banking services as a way to deal with physical shutdowns.

“What could have taken 10 years in technology has been sped up to about a year and a half. Bank customers have become much more accepting of technology for banking business,” said Samant.

For example, Samanth said electronic check depositing took off during the pandemic.

The banking industry’s shrinking middle class hurts people from underrepresented communities who want to borrow to start a new business, he said, because that type of loan carries more risk than the average.

“The big banks are well prepared for this. They have the funding. But this segment of the business is not very interesting for them because it is very customer intensive as you have to know your customers,” said Samant.

And Samant said that while small banks know their customers, they don’t have the resources to lend to people with little history of starting a business.

“Lending to underrepresented groups is not attractive to the big banks because they are not seeing the profit margins they are looking for. This is a business better suited to small banks. Unfortunately, small banks don’t always have the resources to take that risk,” said Samant.

Branch closings have also occurred disproportionately in underserved communities or in low-income areas. Samant noted that federal community reinvestment laws to prevent redlining can go some way to mitigating the loss of opportunity for people in underserved communities who want to start a business.

The Heartland Bank and Trust merger is expected to close in the first quarter of 2023. At that time, Town and County shareholders are expected to own about 11 percent of Heartland’s stock, 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 over about two years.

On Wednesday, Heartland Bank announced a management shakeup.

Patrick F. Bush, executive vice president and chief credit officer, will step down at the end of the year and fill the newly created position of vice president. Busch will continue to be involved in the development of the business, according to the news release, and will 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 Credit Officer.

“Pat Bush has been an integral part of the company’s and Heartland Bank’s success since 1995. On behalf of the entire company, I would like to thank him for the valuable role he has played in the company’s significant growth,” said CEO Fred Drake. “Larry Horvath will be a strong successor to Pat as our new Chief Credit Officer and will continue the conservative lending culture that has made the company a high-performing bank.”

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