In the face of a weak but steady economic recovery and prevailing low rates for deposits and many loans, sensible credit card portfolios are starting to shine as a rewarding line of credit union business, despite technological uncertainty, security risks, high unemployment and cautious consumer spending.
For many, credit card outstandings are the one asset that delivers a robust net interest margin. This circumstance has made a believer out of CUES member Dan McGowan, CPA, CMA, CITP, CGMA, SVP/chief financial officer for $138 million Pioneer West Virginia Federal Credit Union, Charleston. The yield on securities is minimal, and good fixed-rate loans are very much in demand but carry relatively low rates, as well as a risk of sinking under water if deposit rates rise quickly.
All that makes floating-rate credit card balances especially attractive, McGowan says. Pioneer West Virginia FCU’s cards carry a variable rate in the 6.95 percent to 17.75 percent range, based on cardholders’ credit scores. With delinquencies running at an annual rate of just 76 basis points of balances (and an all-time low of 40 bps in February) and with charge-offs a microscopic three bps a month as of the end of February, McGowan is determined to grow balances from the current $5.4 million, or 6 percent of the loan portfolio, to 10 percent or more.
But with members continuing to deleverage, growth has been “slower than I would like it to be,” he concedes. Still, the CU’s 32 percent annual growth in card balances between June 30, 2010, and June 30, 2011, placed it 15th in the nation among all CUs and first in West Virginia in rankings done by Callahan and Associates. From March 2011 through March 2012, balances grew by $1.5 million, or 40 percent, McGowan notes.
“We’re prepared to accept more credit risk, but the balance transfers we’re getting, by coincidence or providence, are of very high credit quality,” McGowan reports. “We’re not complaining. It’s nice not to have to pump more into the loan loss reserve to cover credit card risk. But we have created targets and incentives specific to bringing in credit card business.
“In reference to delinquencies, our trends indicate consistent and tremendous improvement over where we were in 2009. So, even if we do see an uptick in delinquencies, most likely it will still remain below historical norms for this institution.”
After contracting during the worst of the recession, credit card debt has been expanding (though it contracted in April), reports Beverly Harzog, credit card expert at credit.com. “It’s hard to tell why. People may be feeling more confident or they may be desperate and using cards to make ends meet,” she says. Because CUs are perceived as more consumer friendly than banks, they’re likely to pick up business from cardholders who think big bank issuers exploit them, she says.
While current card balances are a highly attractive asset in this low-rate economy, the 2010 CARD Act has limited issuers’ ability to raise rates if delinquencies or funding costs increase, a twist that calls for alert risk management, says Jeff Russell, senior advisor at The Members Group, a CUES Supplier member based in Des Moines, Iowa. Balances can be rate-protected for as long as three to five years, he cautions.
“Understand the interest rate risk in your card portfolio, and index your rates so they can rise with the market,” he advises. Under the assumption that “fairness” means charging all members the same rate, many CUs have been slow to “manage line assignment for risk as actively as they should,” he says.