Case Study: USA Federal Credit Union’s Decision to Keep Their Credit Card Portfolio

United Services of America Federal Credit Union, headquartered in San Diego, CA, recently made the decision to keep its credit card portfolio, following a thorough assessment of its portfolio’s financial performance and part-nership opportunities.

Although the credit union has a sizeable credit card portfolio, more than $37 million, the portfolio suffered from challenges common among credit union credit card issuers of all sizes: declining balances, accelerating delinquencies, and lack of attention from CU management.

THE PROCESS
In October 2004, CEO Mary Cunningham decided it was time to evaluate their options. She wanted to find out more about the performance of her credit card program, and she sought an objective analysis that could help her and her team make an informed decision about how a portfolio sale might impact the credit union financially and strategically.

The first step for the credit union was to interview three credit card portfolio brokerage firms.

“When we started talking to brokers, it was important to find someone that could give us objective advice and who truly understood the credit union philosophy,” said Cunningham.

Cunningham continued, “AssetExchange emerged as the obvious choice. In addition to being objective, they respected our timeline, kept our information completely confidential, and demonstrated a keen understanding of the challenges and choices we had ahead of us. They represented us very well throughout this process.”

EVALUATING OPTIONS
AssetExchange conducted a thorough assessment of USA Federal’s credit card portfolio and provided an in-depth analysis of performance trends since December 2002.

The analysis covered many key performance indicators including growth, credit risk, yield over time, and more. The report also included a profitability analysis and partnership offers from three credit card issuers.

In order to further aid in the decision-making process, AssetExchange conducted a thorough examination of the economic impact each offer would have on the credit union. This assessment also stress-tested each offer, as well as the portfolio itself, under various scenarios in order to help the credit union understand the potential risks inherent with each decision.

“The report that AssetExchange prepared for us was quite revealing,” said Cunningham. “They converted the raw data from our processor reports into graphs and charts that were easy for me and my team to evaluate. The assessment showed us what we had, and showed us where we were headed under various scenarios, such as if we were to sell our portfolio, or maintain status quo.”

The analysis was broken down by each card product line and revealed that USA Federal had a very high credit card acceptance rate among its members.

Unfortunately, it also indicated that balances and accounts were declining, delinquencies were on the rise, and credit line utilization was high compared to other credit unions.

“We were given all of the tools and resources to make an informed, confident decision about the future of our credit card portfolio,” continued Cunningham. “The format of their assessment allowed us to compare the impact of our various options ‘apples to apples.’ They never pressured us to choose one course of action over another and they were always available to meet with us to answer our questions.”

THE DECISION
“We decided to keep our portfolio,” said Cunningham. “We were alarmed to see that our balances and accounts were declining, but the assessment revealed that our credit card program was a high yielding product. We acknowledge that we have neglected the portfolio in recent years, but we’re not ready to give up on it. Fortunately, we have patience and are willing to commit the financial resources needed to make this program a success over the next three to five years.”

ACTION PLAN
Cunningham and her team have outlined a 3-year plan designed to grow their credit card portfolio and they have dedicated the necessary capital to invest in achieving their goals. In 2005, USA Federal will focus on database clean up, stimulating usage among inactive cardholders by increasing credit limits, and adjusting offers to attract new accounts. In 2006, the credit union will hire additional staff to focus on credit cards, which may entail a complete revamp of the program. Additional plans include evaluating the pros and cons of bringing the card program in-house.

Meanwhile, USA Federal will continue to work with AssetExchange, which will monitor the progress of the portfolio. If the credit union is unable to achieve its desired results within a reasonable timeframe, AssetExchange will obtain new partnership offers and assist with another evaluation.

BOTTOM LINE
“The advice I’d give to other credit union executives is, ‘Don’t ignore your card program,’” said Cunningham. “And I would recommend working with AssetExchange. They’ll help you gather all the information you need to evaluate and pursue your options. They don’t persuade or direct you, and they provide an objective yet comprehensive approach.”

Cunningham continued, “Once you have the information in front of you, act decisively. Whether you keep or sell is not important, as long as you make a decision that is in the best interests of your members and credit union — and follow through with it.”

Mary Cunningham is the President/CEO of USA Federal Credit Union, headquartered in San Diego, California. USA Federal Credit Union serves all branches of the military with specific emphasis on the Navy, as well as 170 SEGs in and around the San Diego area. The credit union has 20 branches, including 12 branches in Japan and Korea. Assets are $680 million and the credit union serves 62,000 members. The credit union currently employees 215 staff members.

Mary has been involved in the credit union movement for 30 years, and has been a credit union CEO for 20 years. She began her credit union career fresh out of college in Oklahoma City. Mary served as President of three area credit unions before moving from Oklahoma City in 1995 to Madison, Wisconsin, where she served as President/CEO of CUNA Credit Union for six years before taking the job with USA Federal in September 2001.

She is a CCUE (Certified Credit Union Executive), a credit union Development Educator, Chairman of the National Credit Union Foundation Board of Directors, a past member of the Filene Research Council, Past Chairman of the CUES Board of Directors, and past Chairman of CUNA’s Project Differentiation taskforce when that program was first introduced. Mary is a frequent speaker and writer in the credit union movement.