All About the Money: Balance-Sheet Pressures Forcing Card Portfolio Sales
"I don't think it's any big secret that credit unions face a number of different financial issues and, as a result, we have been fielding more inquiries from credit unions who want to talk about selling their portfolios," said Willie Koo, CEO of Asset Exchange, a credit union card consultancy and brokerage owned by Fidelity National Information Services. "But we also have to tell them that now is not the best time to sell their portfolios. And we have seen a number of attempted sales fail to close."
One recent example of a sale nudged along by the bottom line came to light last week when the $1.8 billion Kern Schools Federal Credit Union revealed it sold its nearly $102 million card portfolio to FIA Card Services, a subsidiary of Bank of America. The credit union did not issue a press release announcing the February sale, and neither the credit union nor the firm that allegedly brokered the deal, Kessler Financial Services, have responded to calls requesting comment.
The terms of the sale and whether or not Bank of America offered any premium for the portfolio were not disclosed. The credit union expects to convert by September its roughly 38,000 accounts to a Bank of America-issued card that will carry the credit union's name and logo, according to an article in a local media outlet, The Bakersfield Californian.
The paper reported as well that the credit union's members will move from fixed-rate to variable-rate cards because of the deal.
According to the CU's disclosures, Kern members will face a default annual percentage rate of 19.99% if the cardholders' payments arrives after 5:00 P.M. on the day it is due or if they go over limit on their cards more than twice in a 12-month period. The CU did not comment on whether this was a change from its previous policy.
In addition, according to the disclosures regarding Kern Schools online credit card application, late fees will be $15 for balances of between zero and $100, $29 for balances between $101 and $250 and $39 for balances over $250. FIA also charges $39 for card balances exceeding the credit limit.
When contacted about the purchase, a spokesman for Bank of America said the bank focused on creating smooth transition for the Kern Schools members and offering them a competitive credit card product.
Asset Exchange CEO Koo concluded that many of the credit unions looking at selling their card portfolios were doing so because of financial pressures and would not have been considering a sale otherwise, and he noted that relatively few are going through with the sales for a couple of reasons.
First, compared to two or three years ago, the premiums for credit union card portfolios have dropped sharply, according to Koo and other CU card brokers. Second, credit card portfolio buyers have become a lot pickier about the cards they purchase and a credit union selling its card portfolio could find itself holding a significant number of its most troubled accounts. Third, Koo reported, buyers have been doing a lot more due diligence about their credit union partners.
"If you are a card portfolio buyer who is interested in it, not just as an asset but as something which you are going to grow over time, you are very interested in whether or not the credit union is going to be around," Koo noted. "Not just whether it's a candidate for regulatory action but whether it might be a merger candidate, too."
Koo said that Asset Exchange had seen several deals fail to close relatively late in the process after the buyers walked away out of concern that the credit unions might not be around as an independent entity for the next five years.
Robert Hackney, president of Card Services for Credit Unions, said that he has been hearing a lot more about money from some of his member credit unions as well.
"I have heard from several that the money is a lot more important now than it has been before," Hackney said. "It's all about the money."
According to Kern's 5300 call report from December of last year, the last quarter it owned the card portfolio, it had more than 38,000 cards worth almost $102 million in outstanding balances with an overall delinquency rate of 2.25%. But the credit union's June 2009 data also showed Kern Schools running in the red by more than $30 million for the year, including the NCUSIF stabilization expenses.
Hackney argued that even during these hard economic times, credit cards on average remained the best performing asset for card-issuing credit unions. The credit unions selling now were selling a long-term asset to deal with an immediate crisis, as well as an asset their members depended upon.
Hackney pointed out that, if anything, a credit card could be more important to a credit union's members in the current economy than other times. "If a credit union sells its portfolio to a bank that saddles its card-holding members with onerous fees or cuts their credit lines without warning, they're going to remember that."