Managing Card Portfolio in Down Economy Is a Mixture of Art and Science
The $1.4 billion SAFE Credit Union, headquartered in North Highlands, Calif., serves 127,000 members in over 97,000 households in Northern California with 20 branches and a local call center. The credit union's field of membership includes Sacramento County and 11 surrounding counties in the state, which puts it in the center of an unemployment rate that has reach above 11%, according to SAFE CEO Henry Wirz.
"Until you have really had to face it, it's hard to really come to grips with what this economic downturn will mean to your card issuing," Wirz explained to other CU card executives attending an executive round table at the conference.
Wirz reported that SAFE had 35,000 credit card accounts as of March 31 of this year. The portfolio had $87 million in balances, representing 9.2% of the CU's total loan portfolio. The portfolio, including the debit cards, takes the work of four full-time staff to manage: one product manager, one new account processor and two senior settlement processes.
In addition, SAFE also offers instant issuance of credit and debit card in each of its 20 branches.
Wirz told the executives that the credit union's card program has been particularly popular with members. In 2008, SAFE members purchased $91.7 million worth of goods and services on their cards, using their cards over 1.2 million times during the year. All this activity earned SAFE $1.6 million in total interchange in 2008 as well.
But Wirz also revealed that despite all the card activity, the credit union's card portfolio lost money in 2008. According to Wirz, in 2008 the card portfolio had total net income, including interest and fee income, of about $7.8 million but watched that profit disappear in the face of provision expenses and other costs to wind up just over $8.2 million in the hole.
With an average interest spread of 627 basis points, Wirz said the CU concluded it had no choice in the face of the losses but to raise rates and start to look really hard at the levels of risk in the portfolio.
"Overall, what we saw is that our charge-offs in the card portfolio increased sharply from the end of 2007 to the end of 2008," Wirz explained, pointing to a graph that indicated the percentage in the number of accounts charged off had moved up from 2.15% in December 2007 to 2.79% in December 2008. The percentage of the dollars lost in those charged-off accounts rose from 2.77% to 4.92% in the same period, Wirz reported.
Given the economy and unemployment that was to be expected, he noted, but what surprised SAFE the most was the biggest increase in charge-offs had been from among SAFE members with the highest credit scores.
According to the CU's records, members with credit scores between 680 and 719 saw the biggest percentage jump in charge-offs over that year, moving their percentage of accounts charged off from 2.13% in December 2007 to 3.66% in December 2008. The percentage of dollars lost in those accounts likewise grew, from 3.18% to 7.38% in the same period. Members in the next lower risk tier, with credit scores between 660 and 679 increased their percentage of accounts charged off from 4.70% to 4.95% and the percentage of dollars lost from 7.41% to 10.91% that same year, Wirz indicated.
Clearly, Wirz noted, this was not sustainable as it gave SAFE a net charge-off rate of about double the national credit union average, and the credit union needed to adopt some significant steps.
First, despite the cost in time and expense, SAFE began rescoring its entire Visa portfolio every six months, a process that Wirz said was not entirely satisfactory since it cost a lot and did not focus on members whose scores had dropped since the previous scoring run.
Still, the rescoring revealed 937 accounts with almost $4.5 million in outstanding balances that the CU judged to be at risk of potential default, despite the majority of them being current on their payments. In response, Wirz explained, the credit union closed the accounts of those members, the 180 who were delinquent between less than a month and six months, and those who were still current.
The result, he said, was a disaster. "Don't do that," Wirz told the executives. "No matter how tempting it might be, I would strongly advise against that approach to cutting your risk."
What happened, he explained, was than when members who had been current on their credit card accounts received word that the credit union had cut off their credit cards, many lost loyalty to the card entirely and stopped making payments. Of the 937 accounts which were closed in January 2008, Wirz reported that 238 of them (33.27%) had been charged off the end of March and that when the numbers of delinquent accounts was added in, the total reached over 50%.
The CU also found that, overall, their members' credit scores were slipping, making those members who had been previously qualified as good risks much more risky.
From the rescoring that SAFE did in July 2008 to the one it did in February 2009, 13% of members in the 680-719 tier slid 14%m while 13% of members in the 660-679 tier saw their scores fall by 13%.
Faced with the clearly changing risk profile of many of its card-holding members and the need to come up with a different strategies for managing risk, Wirz said that SAFE had begun using a triggering program to alert it to when cardholders might be slipping into a more risky status.
Some of SAFE's triggering criteria include a credit score less than 640, a bankruptcy prediction score of less than 620, a slide in credit score of 30 points and credit card balances of $35,000 or more. Once triggered, an account is reviewed more closely to determine if other actions need to be taken, all of which are less drastic than closing accounts, Wirz explained.
In general, the types of actions often chosen are a reduction in credit limits rather than closing the account and may include other ways to lower the risk to the CU, he said. In general, Wirz said the CU had seen a lot of push back from members on the increased rates but added that members had understood that SAFE's choice had been between raising rates and offering a card at all. When put in that light, Wirz said, more members were understanding of the need for the increase.
At another table, also addressing risk, Jim Blouin, director of portfolio management for Fidelity National Information Systems, a leading card processor, urged credit union card issuers to score their card portfolios again now. "The fact is that the 700-plus portfolio may not be a 700-plus any longer," he said. "If you are going to manage your cards effectively, you need to know that."