Atlanta Bank Turns a Profit Collecting for Small Issuers

  Credit cards can be a loss leader for small banks. A lean portfolio of low-margin cards rarely generates enough volume to produce big profits, and collections can be tedious and time-consuming for a small staff.
  The same equation holds true for what are known as wholesale or correspondent banks, which provide card and collection services to small community banks. For them, aggregating a card portfolio, and working it efficiently, takes time and patience.
  Despite such obstacles, however, Bankers Bank, an Atlanta-based wholesale bank, has turned credit cards and debt collection into a steady, profitable revenue stream.
  "It took nine years to turn a profit on the cards," says Frank J. McGonagle, vice president of bankcard collections at Bankers Bank, which offers a wide array of services to community banks. "We stuck with bankcards because it was a valuable service to community banks."
  The bank's card operation services 818 portfolios, up 37% from 600 in 2005. During the same period, the number of credit cards serviced in those portfolios has grown 30%, to 125,000 from 96,000.
  The card department had first-quarter 2007 earnings of $1.97 million, a 13% increase over the same period last year. Cardholder volume was $127.9 million, 20.4% higher than the first quarter of 2006.
  As of March 31, average outstandings were $96.6 million, 11.9% more than the same period in 2006. Consumer applications in the first quarter totaled 2,943, a 43% increase over the first quarter of 2006.
  Net charge-offs at the end of 2006 were 1.64% of receivables, well below the industry average of 3.9% as measured by Cards&Payments ("Exclusive Bankcard Profitability Study & Annual Report," May). The Bankers Bank delinquency rate at year's end was 1.2%, again well below the national average.
  Results improved further in the first quarter of 2007. Delinquencies were 1.09%, and net charge-offs were 0.86%. "I'm liking life right now," jokes McGonagle.
  Bankers Bank's card operation currently accounts for about one-third of the company's revenues, according to McGonagle. The department provides customer relations, credit underwriting, collections and merchant services.
  McGonagle's philosophy is to take a hands-on approach to collections. Accounts are regularly reviewed with the goal being to spot potential problems early on. In the process, the collection department at Bankers Bank develops a close working relationship with its community bank clients.
  The tone of collections at Bankers Bank is that of providing help to the delinquent cardholder instead of a hard-nosed approach, McGonagle says. He notes that with caller ID and voicemail, it is easy for cardholders to ignore or avoid collectors' calls, so a helpful approach is more effective.
  Collectors do not use the Bankers Bank name when contacting cardholders. Collection calls and letters are done under the generic-sounding name, bankcard center. Delinquent cardholders in serious trouble are offered a fixed-payment program. Their interest rate, for example, might be reduced to, say, 6% from 14.5%. Delinquent and over-limit charges would be dropped in such a plan, McGonagle says.
  MONTHLY INCENTIVES
  Collectors get monthly incentives of $200 if delinquencies are below 1.5%, $300 if below 1.25% and $500 if below 1%. There also are monthly incentives of $200 if charge-offs are below $150,000, $300 if below $125,000 and $500 if below $100,000. An annual bonus is paid on performance. "If they hit all their marks, it's a big bonus, and they go after it," says McGonagle.
  The card operation has 35 employees, four of whom are collectors. The collection work is segmented, McGonagle explains. For instance, one collector handles all delinquent and over-limit accounts, while another manages potential charge-offs.
  "This allows personal accountability," McGonagle says. "We measure what they collect."
  The Bankers Bank handles underwriting criteria for credit cards, although community bank customers can challenge lending decisions. "The Bankers Bank gives us 48 hours notice if they decline a credit card application," says DeWitt Booth, vice president at First National Bank of Pulaski, in Pulaski, Tenn., a Bankers Bank client. "We can override the decision."
  In those cases, the bank often knows of a customer's extenuating circumstances, Booth says. For instance, an older bank customer may not have a credit history but may want a credit card.
  The community bank guarantees those accounts. At present, community banks guarantee about 8,000 of the Bankers Bank's credit cards. "The bank has a vested interest, and we keep them in tune on account activity," says McGonagle.
  QUICK RESPONSE
  For example, if a major guaranteed account is one day delinquent, Bankers Bank's collectors are on the phone to the community bank to let it know the status of the account.
  Currently, the Bankers Bank handles about 500 credit card accounts for the First National Bank of Pulaski. In 2002, First National acquired the Bank of Belfast in Marshall County, Tenn. It sold the Bank of Belfast's credit card portfolio of about 156 cards to Bankers Bank. "We did not want to manage it," says Booth.
  The Bankers Bank handles collections, though about 100 of the cards in the Pulaski portfolio were sold with recourse, which means that, after a 90-day delinquent period, the collection work reverts to First National Bank of Pulaski.
  Booth says the Bankers Bank collection department works closely with his bank during the 90-day period to help locate customers and collect the account. "We have not had to eat a lot of the delinquencies," says Booth.
  COLLECTION PROCESS
  Uncollected accounts held by the Bankers Bank are charged off at 120 days. The accounts are then sent to one of four outside agencies for the collection process.
  McGonagle segments the agency work by type of account, just as he does with his own collection staff.
  Two outside agencies handle consumer collections. One does probate and bankruptcy work, while the other handles only business accounts.
  Bankers Bank also buys card portfolios, which McGonagle says is a growing activity. In 2006, it purchased portfolios valued at $3.6 million. As of June of this year, the company has bought $2 million worth of portfolios, with another $8.2 million expected to be purchased later in the year. Portfolios valued at $131 million are under review, McGonagle says.
  Its emphasis on service bodes well for the Bankers Bank as it embarks on a major expansion, including a robust push further into cards and collections. "We're on the move," says McGonagle.
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