DALLAS -- The $1.19 billion Credit Union of Texas sold its credit card portfolio to FIA Card Services, the card issuing subsidiary of Bank of America, making it the biggest sale in what has otherwise been a down year of card portfolio sales.
As is customary in these agent issuing agreements, the cards will continue to carry the name of the credit union and only a small identifier--usually on the back of the card--letting the cardholder know the card is actually issued by FIA. The credit union will also continue to help FIA market the card and participate in card revenue; a factor the CU has acknowledged proved an important part of the deal.
According to a statement from Brookwood Capital, the card brokerage that facilitated the sale, and NCUA data, the deal brought BofA 19,000 member accounts with outstanding balances of just over $44 million.
"We analyzed all available partnership options thoroughly to determine what option was best for our members," said John Lederer, president/CEO of Credit Union of Texas. "Our number one priority was to partner with a credit card organization that shared our commitment to providing exceptional service to our members --we are certain that we have found that commitment in FIA Card Services. The card program directly addresses the membership needs for more choices, better programs, low rates and meaningful rewards."
FIA shared Lederer's enthusiasm. "FIA Card Services is pleased to name the Credit Union of Texas as our newest credit union partner. We are looking forward to providing their members with outstanding products backed by exceptional services," said Jeffrey Fincher, senior vice president at FIA.
The deal, which closed in the last quarter of 2007, represented a bright spot in what otherwise had been a lackluster and conflicted year in the market for CU card portfolio sales and management. NCUA data indicated that sales for the year, even including this transaction, were down from last year, and it has been months since FIA has announced a purchase of a similar size (See related story, page 6).
At the same time, 2007 saw a number of credit unions--most of them associated with FIA--allow their agent agreements to lapse and move back into card issuing themselves. Further, survey results from Asset Exchange, a card brokerage owned by a leading card broker, suggested this could be a trend, as other credit unions unhappy with their agent relationships have reported considering the same step.
In an interview with Credit Union Times, Lederer maintained that the CU's decision to choose FIA over one of the credit union-owned card portfolio purchasing and management organizations was the product of a very long process to find the best card partner and that the CU had not rushed to make the decision.
"We looked at this question very carefully and examined the issue closely to see which partner could provide our members with the sorts of card products and services that we believed they wanted," Lederer explained. "We looked at the card program we had and we had to decide if we wanted to make the investments in it to change it ourselves or if it would be better to let someone else with a better array of possibilities take that on."
Lederer said that the CU offered different card programs that carried both the Visa and MasterCard brand, but said that none of the cards offered a rewards program and that the CU had not adopted the variable interest rates that have become more prevalent in credit union card programs.
Credit union card consultants often advise credit unions to adopt variable interest rates on their cards because that often allows them to offer their best card holders' interest rates competitive with other card issuers while also pricing their cards to reflect the risk from cardholders with lower credit scores.
Interestingly, Lederer reported that FIA decided to keep the credit union's fixed interest rate, however. Market analysts said that an analysis of the CU's card portfolio statistics provided to NCUA certainly suggests that the card program needed assistance. Although it had not suffered any precipitous loss of value, the portfolio had nonetheless stagnated and slowly lost value since the end of 2003.
According to NCUA data, the Texas CU's card portfolio at the end of 2003 had outstanding balances of $44.6 million, a level it never again achieved. However, the CUs card penetration stayed fairly steady as number of accounts stayed between 15,000 and 14,000 between 2003 and 2007 as the CU's membership dropped from 198,000 members to 172,000 over the same period, the agency data showed.
Lederer acknowledged the CU has faced ongoing financial troubles as it digs itself out from the financial fall out from Centrix-originated auto loans (See related story, page 1). According to NCUA, the CU has moved from $1.61 billion in assets in June 2004 to $1.19 billion now and the CU has seen its net worth ratio drop to 6.75%.
"Of course I can't say that our current financial situation played no role in our decision because it's no secret that we are digging out of a hole, but it wasn't the biggest or only thing that guided us to sell," Lederer said.
As with most credit unions that sell their card portfolios, Lederer declined to reveal the specifics of the sale such as how much of a premium the CU received. However, he did say the credit union had opted for a smaller premium in favor of a larger share of the revenue stream from the cards going forward.
"We definitely wanted to make sure we replaced that important income stream if we sold the portfolio," he said.
Interestingly, Lederer reported that FIA decided to keep the credit union's fixed interest rate. Often moving from a fixed rate to variable rates is one of the first things a CU portfolio buyer does to both grow the portfolio and improve its revenue.
Frank Selker, co-founder of Asset Exchange, said he was not particularly surprised at the Credit Union of Texas sale since the CU fit the recent pattern of credit unions selling their card portfolios to help ease balance sheet problems. Also, Selker noted that the CU had reported its card rate at 14.9%, a relatively high number that might have influenced FIA's decision to keep it in place.