An analysis of credit union call report data from the first quarter of 2009, prepared by Asset Exchange, revealed seven credit unions sold their card portfolios since the first of the year.
The two largest were the $101 million card portfolio sold by the $1.7 billion Kern Schools Federal Credit Union, headquartered in Bakersfield, Calif., and a $53 million portfolio from the $647 million American First Credit Union, headquartered in La Habra, Calif. Both credit unions sold their portfolios to FIA Card Services, a card-issuing branch of Bank of America.
The pair faced pressure on their balances sheets, with Kern Schools posting a net worth ratio of 5.44% and American First at 6.44% as of the end of March. Together with the sales of the five other smaller portfolios, the total card assets sold for the quarter was $190 million, FIA, the card brokerage and consultancy headquartered in Portland, Ore., and owned by card processor Fidelity National Information Services, reported.
Neither credit union returned calls for comment about the sales.
The transactions were the biggest sales of CU card portfolios in several years. From 2003 through 2007, a number of credit unions sold their card portfolios to other issuers and then generally entered into agent agreements, which allowed the buyers to keep issuing cards in the names of the credit unions. Sales of CU card portfolios and agent-issuing agreements fell off as more credit unions began to improve their card portfolio management and others that had sold began to express disappointment with the agent agreements.
Credit unions often received either a hefty premium for their card portfolios or a percentage of finance and fee income after the sale, or both, but brokers report that those days are long past.
"Anybody who was in the market to sell the portfolio and did it a couple of years ago looks like a genius now," remarked Tim Kolk, a managing partner with card brokerage Brookwood Capital in Peterborough, N.H. "But of course, you had to be in the market to sell," he added.
Even with the poorly performing economy, credit union card portfolios continued to grow in the first quarter, albeit not as quickly. According to Asset Exchange's analysis, outstanding balances on credit union card accounts grew by 5.9% between March 2008 and March 2009. This is down sharply from the 16% growth they posted in the first quarter of 2008. The number of card accounts grew by 2.4% over the same period, and this was also down sharply from the 21% growth they posted in the first quarter of last year, the card brokerage reported.
The call report data showed that an increase in CU assets overall led to a decline of card assets as a percentage of credit union assets to 4.5%. They had been 4.7% of assets in the first quarter of 2008.
Even though the credit union industry's card performance has remained relatively strong when compared to the industry overall, the brokers said that many credit unions in various financial difficulties are evaluating their card portfolios as assets that could be sold to raise cash if they had to do so. The problem they face, the brokers explained, is that the market for those portfolios is not what it used to be. This is partly because changes in the economy or the law.
For example, in previous years, one of the first things a purchaser of a CU card portfolio did was review and usually increase credit lines. Credit unions, in general, were fairly conservative about making credit available, and there was often room to increase balances by offering larger credit lines. But now in the economic downturn, larger credit lines look like poor economic strategies or are simply too risky.
Another way CU card portfolio purchasers used to try to recoup a high premium they might have paid was to increase interest rates, particularly by moving a fixed-rate card to a variable-rate card. But changes in the law make changing card interest rates a more difficult and slower process it had been, the brokers observed.
They also noted that the portfolio buyers are exerting a good deal more caution about which card accounts they are going to buy. Leaving problematic accounts out of a portfolio purchase is nothing new, but the brokers noted that card purchasers are being even more careful about what they buy than they used to be.
"There really isn't any interest at all in taking anything that even looks like it might be a problem later," Kolk said.
Finally, the brokers said that portfolio buyers are paying close attention to the overall health of the credit unions they are considering buying portfolios from and for which they would issue cards.
"A significant number of credit unions are evaluating their card portfolios with an eye toward potentially selling them," reported Kolk. "But in many cases they find the seller evaluating whether they might be a candidate for merger or worse."
Frank Selker, president of Asset Exchange, agreed.
"Potential buyers are paying a lot more attention to the health of any possible credit union partners because, from their perspective, they aren't just buying the card account but also hoping to build on cardholder relationships with their credit unions. Those relationships will shift dramatically or even disappear if the credit unions have to merge with others," he explained.
Both Kolk and Selker said that even though the level of credit union interest in selling card portfolios appears to have increased as the downturn has continued, they doubted whether the market would return to its rapid pace of a few years ago. Partially this is because credit unions continue to improve their card management skills and are less open to arguments that another issuer would offer their members a better card deal. Also, not all credit unions face the same balance sheet pressures that led to the most recent sales, the brokers said.
"I expect that you are still going to see sales, but they are often from those very troubled states-California, Florida, Nevada and Arizona," Selker said. "I don't think we are going to see a general, industrywide trend."