Credit unions and banks have been at odds for years, but Town North Bank in Dallas refuses to get pulled into the fray — for good reason.
Though it is in many ways a traditional community bank, the $875 million-asset Town North is owned by credit unions, its board is made up entirely of credit union chief executives, and a primary business line now is buying credit card portfolios from credit unions.
In fact, the credit unions have been so happy with their investment that 16 of them pledged in December to invest another $60 million in the bank's holding company, C.U. Bank Shares Inc. of Farmers Branch, Tex. — and Town North could have raised more. It turned away pledges for another $35 million, said John Reap, the president and chief executive officer of the bank and its holding company.
"We got enough in one fell swoop to double our capital," said Mr. Reap. He added that the money would be paid in over the next two years and would be used to buy more card portfolios and to bolster commercial credits and commercial real estate lending.
Town North also coexists peacefully with local credit unions because it does not compete with them for retail customers. Catering exclusively to business customers, it has just one office and only offers checking accounts to people who that work in its building.
The bank was chartered in 1972 as a traditional community bank; a group of credit unions bought it in 1975 to facilitate their credit card processing.
For nearly the next three decades, its credit union relationships were limited to processing. In 2003, however, in search of sources of income to help offset a squeeze on the net interest margin, Town North started buying card portfolios from its credit union customers. Today, credit card loans acquired from credit unions make up 30% of its loan portfolio, Mr. Reap said.
For its owners, the bank has supplied more than credit card services — it has paid steady double-digit returns on their investment for years, said Gary Tuma, chairman of the bank holding company and the president and chief executive officer of the $350 million-asset Smart Financial Credit Union in Houston.
Smart Financial owns a stake in Town North and subscribed to its most recent stock offering.
"It's been the best investment our stockholders have had," Mr. Tuma said. There "was no hesitation" when Town North asked whether his credit union wanted to participate in the latest stock offering, he added. "The only question was, 'When can we get it done?' "
Town North has nearly tripled its assets since it began buying credit unions' card portfolios three years ago. In January alone, it added $50 million to its credit card portfolio through purchases, bringing it to $175 million, Mr. Reap said.
The bank plans to grow in the next three to five years by increasing its warehouse mortgage lending from $55 million to $125 million, hiring loan officers for the traditional commercial side so that it could add loans at a rate of 10% to 15% annually, and expanding its credit card portfolio to as much as $700 million.
Most small banks have already sold their credit card portfolios, so much of buyers' attention in recent years has turned to credit unions, said Frank Selker, the president of AssetExchange Inc., a Portland, Ore., company that specializes in brokering card portfolio sales by credit unions.
Credit unions are choosing to sell because it is one way they can add capital to fund growth. They get the capital by selling their portfolios at premiums ranging from 5% to 30% and can then reinvest the money in loans, branches, or other areas where the credit union sees growth possibilities.
Raising capital to fund credit union card portfolio purchases makes sense for Town North, Mr. Selker said.
"It's a market that is constantly seeing buyers get stronger and other buyers get weaker," he said. "Some of the strong buyers have reduced activity in the last few years, and that creates opportunities for [Town North] to step up and do more."
Town North's credit card unit has relationships with 454 credit unions in 36 states.
"We are running two business units — two separate companies almost," Mr. Reap said. "This is a great example of two competing industries working together for the common good."
Both Mr. Reap and Mr. Tuma said they believe the animosity between banks and credit unions is largely manufactured by industry trade groups.
But Chris Williston, the president and chief executive officer of the Independent Bankers Association of Texas, said trade groups get their marching orders from members — and members are very concerned about credit union competition.
Banks generally have no problem with the roughly 80% of mostly small credit unions that have stuck to serving specific groups, he said. It is the larger credit unions that have received community charters and are targeting banks' customers, and not paying taxes, that have caused irritation, he said.
"Bankers care a great deal about those that are abusing their chartered authority," Mr. Williston said. "Our members set our agenda, clearly. They rely on staff to bring issues before them, and we are quick to make recommendations, but at the end of the day it is their organization. We let them determine where they want us to march."
