It took a lot of arm-twisting for Happy State Bank in Texas to agree to buy a trust company that specializes in issuing bonds for church construction, but it took to the business so much that it bought a second one, and it does not plan to stop there.
"We would very much like to own additional corporate trust companies," J. Pat Hickman, the chief executive officer at the $625 million-asset Happy State Bank, said in a recent interview.
Mr. Hickman said he likes the business because it diversifies the bank's portfolio and generates fee income and deposits. And the business lines it is in are unique enough that he does not have to worry much about competition, he said.
Happy State Bank is hardly alone among small banks looking to add more fee-based businesses to boost earnings as profits on traditional lending continue to shrink.
Yet though many offer personal trust services, most small banks have exited the corporate trust business because they cannot generate enough volume to make it worth their while, said John Muell, the practice quality manager in the advisory services practice at Brintech Inc. in New Smyrna Beach, Fla.
Indeed, according to data from the Independent Community Bankers of America, less than 250 community banks use their trust powers for corporate business while roughly 1,600 offer personal trust services.
(And even the personal trust business is not particularly lucrative for small banks, Mr. Muell said. He noted that most offer it is a means of retaining customers who might otherwise defect to larger banks.)
Happy State Bank balked when it was first approached a few years ago about buying an Arizona trust company that specialized in issuing church bonds.
Like many community banks, it has shied away from the corporate trust business because it did not know enough about it and, moreover, was not too keen on investing in a business located nearly 800 miles away.
Then in 2004, after being solicited for the third time, Happy State Bank decided to buy Colonial Trust Co., which has since been renamed GoldStar Trust, because one of its top executives, David Norris, agreed to move to Phoenix to oversee the business. It has been so pleased with the results that it bought a similar company, American Church Trust, in Houston two years later.
The two trusts have combined assets under management of just over $1 billion, and American, with 9,000 accounts, is believed to be the largest holder of individual retirement accounts invested in precious metals, Mr. Hickman said.
As a church bond trustee, Happy State Bank administers bond payments for churches all over the country that sell bonds to their congregations so that they can build or make capital improvements. Happy State Bank, as the bond trustee, accepts the payments from the church and distributes them to the bondholders.
The bank collects a fee for serving as trustee and the proceeds from the bond sales are held as deposits at the bank until it is time to repay the bondholders.
There are drawbacks, however, to being the trustee on church accounts.
When a church does not make its payments, it becomes the bank's responsibility to foreclose on the church and liquidate the assets for the bondholders. And that has put the bank in an awkward position from time to time.
"We've actually had to repossess some churches for the bondholders," Mr. Hickman said. "That's pretty different, let me assure you."
Cris Naser, senior counsel with the American Bankers Association, said that over the past decade many stopped actively marketing corporate trust services and now might only take on the role of corporate trustee when a local government is looking to issue bonds and needs a trustee.
The business can be profitable, she said, but "it can be very risky."
The risk comes from the possibility of lawsuit should the bond go into default. When defaults occur, bondholders often blame the trustees and, at times, have attempted to sue them, Ms. Naser said.
Happy State Bank is merging the trust companies to improve efficiency. This month it started relocating the two trusts to Canyon, Tex., which is about 20 miles south of Happy State Bank's administrative offices in Amarillo. The two will be merged into a single division within the bank and do business under the name GoldStar.
Mr. Norris, who originally wanted to move to Phoenix because the weather allowed him to ride his Harley-Davidson motorcycle more days out of the year, did not mind moving back to Amarillo, where his first grandchild is expected soon, Mr. Hickman said.
Mr. Hickman acknowledged that the biggest challenge at first was simply understanding the trust business.
"Bankers are primarily lenders," he said. "Our risk is in a loan, and we look at how that loan is going to be paid back or not be paid back. When we are buying deposits, we look at how well we are going to be able to put our margins to work. That's what we do. This company, because it is no credit risk on our part and it was so unique and different from normal banking, it took us a while to get our arms around it."
Still, the business venture has been worthwhile. Last year it netted nearly $900,000 and accounted for roughly 17% of the bank's profits. Mr. Hickman said he hopes the trust will clear $1.25 million in profits for the bank in 2008.
This year, however, net income from the trust has declined significantly because of costs related to the move of the two trusts. Mr. Hickman put the cost of the move at about $500,000.
