Premiums for Credit Union Card Portfolios Surprisingly Robust

THOUSAND OAKS, Calif. – There were approximately 40 credit union card portfolio sales last year, and the good news for credit unions looking to sell is CU portfolios may be fetching higher price tags these days due to market conditions and credit quality. The high quality of credit union card accounts, combined with a general flight from so-called sub-prime card lending and greater awareness of their portfolios’ value has led many credit unions to receive significantly higher premiums for their card assets than they might have been expecting, according to Robert Hammer, CEO of R.K Hammer Investment Bankers. “Historically, only the largest portfolio sales have been thought to generate the high-end premiums, bordering on 20% or greater,” said Hammer, who is a long-time card portfolio broker, consultant and buyer. “But the data we have collected from 2002 and into 2003 – and even further in the past, has indicated that has not been the case.” Hammer acknowledged that, in general, the question of premiums for card portfolios are closely held by the parties to the sales and are generally not publicly available. But he maintained that his long history in the industry, his relationship with many different financial institutions and portfolio buyers, as well as his work as a consultant allows him access to information about their portfolio sales. “I don’t claim to speak for the entire industry,” Hammer said. “And I don’t question it if someone else says they have not seen the same premiums I have. I can only see a snapshot of the overall situation at a given time,” he added. He also pointed out that the number of portfolio sales is now so relatively small that even if someone had a complete view of all the transactions of a given amount in a given year they might not have enough information to proclaim a trend. If there are only two sales of $10 million dollar portfolios in a given year, Hammer noted, it’s hard to say those premiums necessarily predict the premium that the third $10 million portfolio would receive. Hammer said that his database of over 500 financial institutions which consult with him from time to time on card profitability questions, combined with a similar relationship with other industry sources like regulators and other brokers, has allowed him to collect the data he researches. According to Hammer, in the industry overall 37 card portfolios of more than $15 million in size changed hands in 2002, while 120 smaller deals, many of which were for portfolios of less than $1 million, did so. Hammer also reported that, according to his data, 16 sales of portfolios of larger than $15 million have taken place in the first quarter of 2003 and that the premiums on these sales have been almost 19%, an increase of 44 basis points over sales at the end of 2002. Other portfolio buyers would not comment on Hammer’s premium figures. AssetExchange, a leading broker of credit union credit card portfolios based in Portland, Oregon conducted its yearly analysis of NCUA and estimated that 40 credit unions sold their portfolios in 2002, a figure which was at least in the ballpark with Hammer’s. But the firm would not comment on the premiums those portfolios might have made. “It is not customary for buyers or sellers to disclose pricing information, but the portfolios we handled in 2002 received excellent premium and revenue sharing offers,” said William Koo, AssetExchange CEO. Likewise Keith Floen, managing director of InfiCU, a subsidiary of the major card portfolio buyer, InfiCorp bank would not comment on the premium data, but noted that AssetExchange’s estimate of 40 portfolio transactions in 2002 sounded plausible. InfiCorp specializes in evaluating and purchasing small credit card portfolios, and Floen noted that if AssetExchange’s educated guess of 40 sales was accurate then InfiCorp would have purchased about 50% of the credit union card portfolios sold last year. Hammer attributed the strength of the smaller portfolio premiums to three factors. First, he said, credit unions’ credit quality in their card accounts is “vastly superior” to that of the industry overall. He noted that this has always been the case, given that credit unions have generally maintained very conservative practices when opening credit lines. But, second, the current regulatory focus on the so-called “sub-prime” credit market has only made credit unions’ card qualities stand out even more, he argued. “I think the regulatory focus on the sub-prime card issuers has been meant to send a message to the industry,” Hammer said, “and that message has meant the sub-prime market has melted down. Now the thing to have is good credit quality.” Finally, credit unions are becoming more aware of the worth of their card portfolios and have been making better deals, he said. “The smaller credit card portfolio owners have finally figured out that they, too, have a very marketable product to sell,” he said. Part of the portfolio’s value now, Hammer said, is the value the purchaser and seller put on the ongoing agent relationship after the sale. Credit quality of the accounts is the place to start, Hammer said, but then the purchaser will look at the growth potentials in the accounts and likelihood that the credit quality will continue, he noted. Hammer also stressed that it would be a mistake to evaluate credit card deals solely through the premium. Each deal could be structured in a way that either increased the premium or decreased it, in favor of some other aspect of the deal that the seller found more important, Hammer said. Both Koo and Floen agreed with Hammer’s overall observation about credit union card quality, though Floen noted that credit unions sometimes hurt the credit quality in their card portfolios by not using different credit scoring tools to the greatest extent they could use them. He also agreed that card portfolio size had been a larger factor in premium prices than it was now. “Credit quality is the biggest factor now,” he said. [email protected]