SANTA ANA, Calif. — Despite experts' predictions that bank credit card delinquencies will rise to 7% next year, $917 million Orange County's Credit Union is completing the process of moving its credit card portfolio back in-house.
Why? Vice President of Lending Jeff Harper said since he started the project, he's had to ratchet up his loss projections as the economy has turned south. However, the bottom line figures are still in the black.
"The key to any profitability is outpacing losses and expenses," Harper said. "We went back into credit cards because we need a high-yield asset on our books, something that would earn a little bigger spread."
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In addition to spread, credit cards also provide both interest and noninterest income, which makes an even bigger bottom line impact.
But will it be enough to offset Southern California's economic problems? Harper said it is enough, for his credit union, at least.
"Actually, overall values are still holding in Orange County, and while certain segments of the economy are being hit harder than others, we're not seeing a huge deterioration here compared to rest of Southern California," he said.
Though Orange County is a well-known suburb of Los Angeles County, it's older and better established than newer developments in neighboring Riverside County, Harper said. FICO scores and incomes are both higher in Orange County, too. Supporting that statement are July 2008 numbers from real estate reporting firm DataQuick, which reported that Orange County's median home price of $461,000 is the highest in Southern California, which stretches from Ventura County to the U.S.-Mexico border.
"You can't really use a broad brush on what is considered a high or low FICO score," Harper said. "To some, C paper is 600, while to others, it's 640."
Though OCCU will keep credit cards on the books, it will outsource servicing to Des Moines, Iowa-based The Members Group. Harper said TMG offers a more specialized package than he could create for the same money on his own XP core system. Grouped expense statements for members, turnkey marketing programs and the industry vendor's specialized regulatory knowledge all played into the decision, he said.
Marketing will lead with a two-pronged approach: selling the a new and improved rewards program to upscale members and offering a teaser transfer to members who are paying higher interest rates than they should thanks to universal default policies that jack up credit card rates if a loan payment due to another institution is late.
Despite ambitious goals to achieve at least 25% member penetration within five years, Harper said the credit union will try to hold revolving balances under the industry average, currently $8,000 per consumer.
Though the economy might hinder growth numbers at first, Harper said, once things are back to normal, the credit union hopes to build up $40 million or more in credit card balances and earn a "good percentage" of profit from the unsecured debt.
The credit union's membership age demographics, which count more Gen Xers than its peers, will also boost the credit card program's potential.
"Not only do we have a good percentage of credit-driven members, up and comers, we also have a good mix of upscale members who earn more than $100,000 a year and pay off their balances each month," Harper said. "And, the numbers show that we have the perfect opportunity to improve our yield by bringing credit cards back in house."
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