Case Study: Strategic Review Results in Portfolio Sale for Texans Credit Union

Texans Credit Union made headlines and history recently when it sold its $52 million credit card portfolio – the largest among credit unions to sell in the past two years.

While there are a number of reasons why credit unions sell their portfolios, Texans’ decision was based on the most common of them: declining portfolio growth, high charge-offs, and an awareness of the significant resources necessary to turn the program around.

Credit Card Portfolio History
In late 2003, the executive team at Texans Credit Union decided it was time to take a closer look at their credit card portfolio. “Our credit card portfolio made up just 6% of our loans, yet accounted for more than a third of our losses,” said Dean Borland, Executive Vice President and Chief Operating Officer. “We knew it was time to research our growth and outsourcing options.” In addition to increasing charge-offs, the credit union noted that its card portfolio had been shrinking at a rate of 10% each year.

Texans’ executive team acknowledged that it lacked the resources and expertise to manage the portfolio at the account level and that it would take a significant marketing investment to reverse performance trends. At this stage, Texans decided to evaluate the possibility of outsourcing card issuance and selling the portfolio.

Decision-Making Process
In December 2003, Texans Credit Union decided to engage the expertise and assistance of the credit union industry’s leading credit card portfolio brokerage firm, AssetExchange.

AssetExchange’s first task was to conduct a thorough performance analysis of Texans’ credit card portfolio, a service the firm offers to credit unions free of charge. The performance analysis, which was based on monthly credit card processor reports provided by Texans, included a review of the portfolio’s key performance indicators, strengths and weaknesses, and recommendations for growing the portfolio.

On Texans’ behalf, AssetExchange solicited partnership offers from every active portfolio buyer nationwide. The portfolio’s parameters met the criteria for several, five of which submitted partnership offers.

In late January 2004, AssetExchange presented the five partnership offers and shared their findings from the performance analysis. Notably, the analysis confirmed Texans’ concerns about portfolio shrinkage and charge-offs and highlighted the significant resources that would be required to grow the portfolio in the future: develop or hire in-house card expertise to manage the portfolio, upgrade technology, develop new product lines, and expand and execute a marketing strategy. Although these measures were feasible, there would be no guarantee of success and it could take several years to recover the marketing investment.

Following the meeting with AssetExchange, the Texans’ team discussed their options internally and came to the conclusion that a portfolio sale would be the optimal strategic course.

“AssetExchange conducted a thorough assessment of our card program and helped us to evaluate our options,” said Borland. “We considered keeping the program, but balances had been declining in recent years and the analysis revealed that it would be costly to reverse. AssetExchange presented side-by-side offers from every active buyer in the market and helped us weigh the strategic and financial implications of selling.”

Texans’ next step was to interview the partnership candidates in order to make a recommendation to their Board of Directors. AssetExchange arranged first round interviews with each of the five buyers and provided Texans with a due diligence process for use with each candidate. The outcome of this process was that Texans narrowed the field of candidates to three.

Texans invited the semi-finalists for face-to-face interviews at their headquarters, and then further narrowed their choices to two candidates. The final step was for Texans’ team to tour the finalists’ facilities, where they became aware of they key product management distinctions between top tier issuers:

• Extensive use of technology
• Account (individual card-holder) level management
• Management and resources focused on credit cards exclusively
• World-class facilities, operations, and products

After the onsite tours and further discussions with AssetExchange, Texans Credit Union selected the partner they felt was the best fit for their organization and their members. Their final step in going forward with the sale was to present their findings to the Board.

Presenting to the Board
AssetExchange was asked to develop a presentation on behalf of the management team, including the detailed assessment of the portfolio and the partnership selection process. In addition, the presentation outlined the implication of a portfolio sale on the credit union’s members, as well as the strategic and financial implications of a sale.
Impact of a sale on the credit union’s members included:

• The Texans CU brand would be prominently displayed on all plastics, statements, and credit card related communications.
• The credit card partner’s name would appear in a discreet location on the card as required by law.
• The partner would be prohibited from cross-selling any non-card financial products, unless given permission to do so by the credit union.
• Enhanced credit card products would be offered to members.
• Partner would be committed to member satisfaction, in terms of rates, fees, credit line, and customer service levels.
• Offers would be targeted at the individual member level.

Strategic implications of a portfolio sale were outlined as follows:

• Credit-card related risk would no longer be the credit union’s responsibility (losses, cost of funds, competitive risk).
• All card marketing expenses would be paid for by the partner. (Potential partners estimated that in excess of 100 basis points of the portfolio’s balance - $500,000 in this case - would be spent annually to promote the Texans CU branded credit card.)
• Texans CU could free up staff and resources to focus on core competencies.
• A world-class credit card issuer would manage the Texans CU credit card.

Finally, financial implications of a sale were presented:

• The credit union would receive an up front premium based on the value of the receivables.
• The partner would pay ongoing revenue-sharing to the credit union based on portfolio performance.
• The credit union could reinvest the proceeds of the premium and revenue-sharing.

The presentation demonstrated that all options were fully explored and that the management team had taken a very thorough and prudent approach in their partnership search by interviewing multiple buyers and reviewing several offers.

The outcome of the meeting was that the credit union’s Board approved the portfolio sale. The Texans team utilized AssetExchange’s expertise in their final negotiations and asked the firm to comment on various parts of the agreements for fairness and reasonableness within the credit card industry.

Texans Credit Union finalized agreements with their new partner and the sale process concluded on June 15th, 2004.

“As a result of the assistance we received from AssetExchange, I am confident we made the best decision,” said Borland. “AssetExchange gave us access to the most competitive offers, which helped us identify the best partnership to suit our members’ needs.”