Timothy Kolk(603) 924-4438tkolk@trkadvisors.com

2019ONLINE CARD SCHOOL

Session #2

Calculating Card Program Πability(& Using It)

June 2019

TRK ADVISORS

2TRK ADVISORS

The Online Card School Purpose

• Provide market and competitive information

• Build critical management skills

• Share proven approaches to growth & profitability

• Develop competitive products you can be proud of

• Help you prove your program’s value to the credit union, your members, and your own sense of living a life fully realized.

CO-OP Financial ServicesStrategic Vision: Your Growth Is Our Growth

SEAMLESS SECUREGreater

Integration

Simplified Client Experience

Business Intelligence

One CO-OP

Ease Of Expansion

Better Authentication

New Tools

Consultation

Business Intelligence

Reporting

4TRK ADVISORS

Webinars, Documents & Access

• Live webinars are open to all 

• Need to be a CO‐OP or TRK Advisors client to receive Access to this year’s recordings Log‐in to library of past sessions (3 year cycle) Downloads of presentation documents

• To register for access: Go to www.onlinecardschool.com Register via the “Learn More Today” area Enter the CO‐OP promotional code (or leave a related note in the 

“Message” input)

• Not a CO‐OP client? Well, let that be a lesson to you!

5TRK ADVISORS

2018 Sessions (Recordings On‐Line)

#1 CARD MARKET OVERVIEW

#2 DESIGNING PROGRAM REPORTINGFOR SUCCESS

#3 BUILDING YOUR ANNUAL CARDACTION PLAN (MORE THAN ABUDGET)

#4 LOOKING AHEAD TO 2019: WHAT’S NEXT?

6TRK ADVISORS

2019 Sessions

Apr 10 CARD MARKET OVERVIEW

June 30 CALCULATING PROGRAMPROFITABILITY (& USING IT)

Sept 5 MAPPING PRODUCTS TOMEMBER EXPECTATIONS

Oct 17 MATCHING PRICING & PRODUCT VALUE TO RISKLEVELS

7TRK ADVISORS

What We Covered Last Session

1. Market has reached record levels• Credit unions overall are doing well. Again.• BUT: half shrank & 80% grew at < market rates

2. Credit losses are creeping up• CU rates now at all‐time high except for recession

3. Prime increases since 2015 (+225bp) have fueled increasing revenues. Move to Signature has fueled revenues. Rewards and promos have fueled expenses.

4. Innovation is creeping, but relentless: data access & delivery, mobile tools and features, contactless a focus…

Q1 UpdateBalances ‐1% from Dec. (typical)

Balances +8% from yr prior

Q1 UpdateNCL Q1 = 3.1%Banks = 3.8%

Gap = 70bp…closing!

8TRK ADVISORS

Quick Conference Season Highlights1. Evolution of Rewards Approaches

Cobrand (1990s)   General (2000s)  Relationship (now)

2. Things We Know, But Need to Keep SayingCard switchers in last year: 47% due to better rewards (JD Powers)68% said rewards most important feature, up from 59% year prior (TSYS)

3. What Types of Rewards:Cash:  30% favor, with 24% of these redeeming at least once per month.Miles: 25% of super prime favors this, scaling down to 10% in sub primeNone: 10% of super prime, 20% of prime, 30% of near, 40% of sub prime

4. Experience: 65% of digital users use mobile tools with their FIRush is on for Younger Cardholders

World Cards: $10 credit for every 5th Lyft Ride, $5 for every two movie tix (Fandango), mobile phone coverageVisa: Visa Next platform allowing mobile wallets to create digital accounts on demand direct to wallets

Citibank adding card rewards to checking accounts.

9TRK ADVISORS

THIS SESSION: PROFITABILITY

Understanding It

Calculating It

Using it for a Purpose

(It’s gonna be a bit of a grind)

10TRK ADVISORS

Why This is Particularly Timely

• Some of our good luck seems to be losing steam: rate increases appear to have paused (or worse), cost of funds catching up, credit losses creeping up…

• The 1‐in‐2 credit unions who are not growing tend to be caught with no plan, so they can’t prioritize or invest.

• Recessions happen. We are closer than we used to be to the next one. Bad decisions happen if not prepared.

• Updating rewards and promotional offers feels expensive, unless you have the right context.

• Planning season will be here VERY soon. Be ready!

On to the Math

Card Program Profitability

11TRK ADVISORS

Nuts & Bolts Day: Building a P&L• Data sources

• Suggested structure

• Building it line by line

• Breaking out by product…and more

• Using it to maximize balance priorities in your program

12TRK ADVISORS

Having a Reliable P&L Is Invaluable

• Full Service: Most Common, Standard Reporting₋ FDR Based (COOP, PSCU, WorldPay, ...): CM‐051 Report₋ FIS Based (FIS, LSC, …): Executive Report ₋ TSYS: Unusual for credit unions

• In‐House: Must produce internally₋ IT Resources should produce monthly ‘portfolio report’₋ More work (you didn’t go in‐house only to save money, did you?)₋ Better access to info for follow up if needed (generally)

• Both: A few other internal pieces (CFO‐type stuff)₋ Cost of Funds₋ Reward Accrual Formula (many are not conservative enough)₋ Recoveries₋ Expense Elements

13TRK ADVISORS

Data Sources: Depends on Processing

14TRK ADVISORS

THE FDR SYSTEM: CM‐051

Several Sections: Looks Like This

Single Page: Looks Like This

15TRK ADVISORS

FIS: Executive Report

16TRK ADVISORS

IN‐HOUSE: IT’S UP TO YOUHere is the (minimum) data you need:

Prod 1 Prod 2 Prod 3 TotalBalances

Month-endRevolving$ in Promo RateCredit Lines

AccountsTotal On FileOpenGross ActiveDebit ActiveNew

ActivityPurchase #Purchase $Cash Advance #Cash Advance $BT #BT $

Prod 1 Prod 2 Prod 3 TotalRisk

Charge-off #Charge-off $Recovery $Fraud ## 60+ DQ$ 60+ DQ

RevenuesFinance ChargesLate FeesOther Fees

Payments# Paid in Full$ Paid in Full# Min Pay$ Min Pay# All Else$ All Else

Get this produced every month.

Suggested P&L Structure&

Building it Line by Line

17TRK ADVISORS

• Accurate representation of program contribution

• Easy to understand and process (Sr Mgt)

• Logical flow showing interactions between the pieces (educational tool!)

• Identify areas for further exploration

• Facilitate priority/strategy discussions. Keep discussions on the rails.

18TRK ADVISORS

Purpose of a Profit & Loss Statement

Part 1: Portfolio InformationTRK Federal Credit Union Portfolio Note:Key Metrics

All Balances 10,000,000$ All the $ owed (typically at month end)Revolving Balances 7,350,000$ FDR System Reports this; FIS does not.Revolve Rate (% paying interest) 73.5% Revolving Balances / All BalancesPurchase $ (net) 28,000,000$ Year-to-date total purchase $ (not one month)

Total Lines 44,000,000$ All credit lines availableUnused Lines 34,000,000$ Total Credit Lines - All BalancesUtilization % 22.7% Balances / Credit Lines

Total Accounts 5,400 Clean up your files: purge 'dead' accountsActive Accounts 3,800 Use a consistent definitionActive % 70.4% Active / Total AccountsNew Accounts 275 Definitely track this!

Average Balance / Active 2,632$ Total Balances / Active AccountsAverage Purchase $ / Active 7,368$ Total Purchases / Active Accounts

30+ Days DQ ($) 80,000$ 2+ Cycles past due ($)30+ Days DQ (%) 0.8% 30 Day DQ $ / Total Balances

19TRK ADVISORS

Suggested Report Structure

• Most are pretty straightforward

• Some choose to track multiple definitions of ‘active’. I generally leave that to deeper analysis if needed.

• FDR system separates delinquencies into 2 groups: ₋ DQ (D Status) &₋ Overlimit DQ (X Status).₋ Add them together.

• Lots of ‘artifacts’ here from the past: Supermarket sales?Warehouse sales?Weird!

20TRK ADVISORS

Where To Find It: FDR System

21TRK ADVISORS

Where To Find It: FDR System (cont.)• Remember to look for the monthly figures, not YTD or prior three months

• You’ll be surprised how quickly you learn exactly where to look

• Data entry favors the bold.

• Some also track cash volume (though on FDR this can include BTs)

• Some also track statused accounts. I generally leave that to deeper analysis if needed.

}

This is interesting but not for today. Track over time.

22TRK ADVISORS

Where To Find It: FDR System (cont.)

This is interesting (though not as interesting as FDR equivalent) but not for today. Track over time.

OR

23TRK ADVISORS

Where To Find It: FIS System

• FIS provides less information in its standard reporting

• Definitions a little different than FDR. That’s ok.

• Make sure to net out returns in sales volume metrics

TRK Federal Credit Union Portfolio Note:Key Metrics

All Balances 10,000,000$ All the $ owed (typically at month end)Revolving Balances 7,350,000$ FDR System Reports this; FIS does not.Revolve Rate (% paying interest) 73.5% Revolving Balances / All BalancesPurchase $ (net) 28,000,000$ Year-to-date total purchase $ (not one month)

Total Lines 44,000,000$ All credit lines availableUnused Lines 34,000,000$ Total Credit Lines - All BalancesUtilization % 22.7% Balances / Credit Lines

Total Accounts 5,400 Clean up your files: purge 'dead' accountsActive Accounts 3,800 Use a consistent definitionActive % 70.4% Active / Total AccountsNew Accounts 275 Definitely track this!

Average Balance / Active 2,632$ Total Balances / Active AccountsAverage Purchase $ / Active 7,368$ Total Purchases / Active Accounts

30+ Days DQ ($) 80,000$ 2+ Cycles past due ($)30+ Days DQ (%) 0.8% 30 Day DQ $ / Total Balances

24TRK ADVISORS

That Gets You To Here (or similar)

P&L Items Year-to-Date Note:($ Basis)

Interest Income 1,010,750$ Direct from processor report. Actual interest billedCost of Funds (100,000) From CFO. Average cost of liabilities (5300 Report)Net Interest Income 910,750 Calculated

Gross Charge-offs (290,000) Maybe from Processor Report. Check against 5300 ReportFraud (14,000) Maybe from Processor Report. Maybe collected internallyRecoveries (est*) 20,000 Certainly an internal figure. Check against 5300 Report.Net Charge-offs (284,000) Calculated

Interchange 520,000 May be a processor report available. Also available internallyAssociation Fees (33,600) % of purchase $, use average for year (Op Cert.)Reward Expense (258,000) ACCRUAL BASIS!!! Cost per point x Redemption RateNet Interchange 228,400 Calculated

Fees 36,000 Direct from processor report

Processing Expense (285,000) Invoiced (put marketing functions in below line)Marketing Expense (19,000) Combination of processor invoice items & other internalInternal Expense (190,000) Internal support, work with CFO. Think of as "per active"Net Income 397,150$ The punch line!

25TRK ADVISORS

Now: To Profitability ($ first)

• We don’t normally care whether interest is coming from cash or purchase balances

• You can report fee lines separately if you want. If you have a card with an annual fee that makes sense (I kinda hope you don’t)

• Credit life fees are a bit different, but also not common

26TRK ADVISORS

Where To Find It: FDR System

27TRK ADVISORS

Where To Find It: FDR System (cont.)

• Charge‐offs are generally reported after reversing interest income.• Some also track the # charged‐off. This can be useful if charge‐off rates are increasing.• “What about interchange?” you ask. Because you are smart. It’s on the CM‐995 Report (by product).

• There is a line for fraud, but seldom used.

• Some report fraud as a separate line. Some bundle it with charge‐offs.

• FIS does you the favor of reporting interchange as a line item.

28TRK ADVISORS

Where To Find It: FIS System

Add in ROA• ROA is simply the $ value divided by the portfolio balance.

• Remember to annualize! (e.g. June $ is only ½ year: multiply ROA calc by 2).

• Allows demonstration of raw bottom line and product return rate

• Data points often needed from internal sources:– Cost of funds (make friends with CFO)– Association fees (usually about 12bp of purchase volume)

– Fraud– Expense lines

• Brand incentives: net to expenses or separate line. But don’t forget them!

P&L Items: YTD $ Basis ROA

Interest Income 1,010,750$ 10.1%Cost of Funds (100,000) -1.0%Net Interest Income 910,750 9.1%

Gross Charge-offs (290,000) -2.9%Fraud (14,000) -0.1%Recoveries (est*) 20,000 0.2%Net Charge-offs (284,000) -2.8%

Interchange 520,000 5.2%Association Fees (33,600) -0.3%Reward Expense (258,000) -2.6%Net Interchange 228,400 2.3%

Fees 36,000 0.4%

Processing Expense (285,000) -2.9%Marketing Expense (19,000) -0.2%Internal Expense (190,000) -1.9%Net Income 397,150$ 4.0%

29TRK ADVISORS

Now That We Have All The $s

• Why APR does not equal Yield

• The stronger your rewards, the lower the revolve rate tends to be.

• Do not assume new accounts will behave like older accounts

• But always revolvers, even in rewards30TRK ADVISORS

Quick Aside: APR‐to‐Yield

TRK FCU Low Rate Signature BusinessAPR to Yield

Average APR 12.5% 14.5% 14.5%x Revolve rate 92% 67% 60%= Yield 11.5% 9.7% 8.7%

• Processor Invoice: Simple enough (credit portion only!)

• Marketing expenses: Third party & out‐of‐pocket should be easy enough. Internal allocations generally not included here.

• Internal: The Tricky Part!– Really should do full cost studies every 3 years– Can use other available data (e.g. Raddon, but be careful)– Most ‘quick’ internal calculations are very much undercounting 

(better to be seen as conservative/objective)

• The Shortcut: Processor and Internal Expenses set to a total of $125 per Active Account per year (“deannualize” accordingly mid‐year).

31TRK ADVISORS

A Word About Expenses

• Processor Invoice: Simple enough (credit portion only!)

• Marketing expenses: Third party & out‐of‐pocket should be easy enough. Internal allocations generally not included here.

• Internal: The Tricky Part!– Really should do full cost studies every 3 years– Can use other available data (e.g. Raddon, but be careful)– Most ‘quick’ internal calculations are very much undercounting 

(better to be seen as conservative/objective)

• The Shortcut: Processor and Internal Expenses set to a total of $125 per Active Account per year (“deannualize” accordingly mid‐year).

The importance of Balance per Account

If Operating Expenses = $125 per year per active account:

If Account Balance is $1,750 this is 7.1% of balancesIf Account Balance is $2,500 this is 5.0% of balancesIf Account Balance is $4,000 this is 3.1% of balances

This difference goes straight to ROA performance

32TRK ADVISORS

A Word About Expenses

Now, Where You Really Need to Be…

33TRK ADVISORS

P&L Items Low Rate Signature Business Total Low Rate Signature Business($ Basis)

Interest Income 343,750$ 580,000$ 87,000$ 1,010,750$ 11.5% 9.7% 8.7%Cost of Funds (30,000) (60,000) (10,000) (100,000) -1.0% -1.0% -1.0%Net Interest Income 313,750 520,000 77,000 910,750 10.5% 8.7% 7.7%

Gross Charge-offs (120,000) (150,000) (20,000) (290,000) -4.0% -2.5% -2.0%Fraud (2,000) (10,000) (2,000) (14,000) -0.1% -0.2% -0.2%Recoveries 6,000 12,000 2,000 20,000 0.2% 0.2% 0.2%Net Charge-offs (116,000) (148,000) (20,000) (284,000) -3.9% -2.5% -2.0%

Interchange 66,000 370,000 84,000 520,000 2.2% 6.2% 8.4%Association Fees (4,800) (24,000) (4,800) (33,600) -0.2% -0.4% -0.5%Reward Expense - (210,000) (48,000) (258,000) 0.0% -3.5% -4.8%Net Interchange 61,200 136,000 31,200 228,400 2.0% 2.3% 3.1%

Fees 15,000 18,000 3,000 36,000 0.5% 0.3% 0.3%

Processing Expense (75,000) (187,500) (22,500) (285,000) -2.5% -3.1% -2.3%Marketing Expense (5,000) (12,500) (1,500) (19,000) -0.2% -0.2% -0.2%Internal Expense (50,000) (125,000) (15,000) (190,000) -1.7% -2.1% -1.5%Net Income 143,950$ 201,000$ 52,200$ 397,150$ 4.8% 3.4% 5.2%

34TRK ADVISORS

Expand To Separate Products (cont.)

Need to think of each card type as a separate product.

TRK FCU 2016 2017 2018 2019Key Metrics

All Balances 9,000,000$ 9,250,000$ 9,500,000$ 10,000,000$ Revolving Balances 7,380,000$ 7,307,500$ 7,267,500$ 7,350,000$ Revolve Rate 82.0% 79.0% 76.5% 73.5%Purchase $ (net) 20,000,000$ 22,000,000$ 25,000,000$ 28,000,000$

Total Lines 30,000,000$ 33,000,000$ 37,000,000$ 44,000,000$ Unused Lines 21,000,000$ 23,750,000$ 27,500,000$ 34,000,000$ Utilization % 30.0% 28.0% 25.7% 22.7%

Total Accounts 4,750 5,000 5,200 5,400 Active Accounts 3,500 3,600 3,700 3,800 Active % 73.7% 72.0% 71.2% 70.4%New Accounts 180 200 245 275

Average Bal. / Active 2,571$ 2,569$ 2,568$ 2,632$ Average Purch $ / Activ 5,714$ 6,111$ 6,757$ 7,368$

30+ Days DQ ($) 68,000$ 72,500$ 75,000$ 80,000$ 30+ Days DQ (%) 0.8% 0.8% 0.8% 0.8%

35TRK ADVISORS

Year‐over‐Year Changes Matter

P&L Items 2016 2017 2018 2019 2016 2017 2018 2019($ Basis)

Interest Income 792,000$ 851,000$ 902,500$ 1,010,750$ 8.8% 9.2% 9.5% 10.1%Cost of Funds (36,000) (55,500) (76,000) (100,000) -0.4% -0.6% -0.8% -1.0%Net Interest Income 756,000 795,500 826,500 910,750 8.4% 8.6% 8.7% 9.1%

Gross Charge-offs (189,000) (212,750) (237,500) (290,000) -2.1% -2.3% -2.5% -2.9%Fraud (10,000) (11,000) (12,500) (14,000) -0.1% -0.1% -0.1% -0.1%Recoveries 18,000 18,500 19,000 20,000 0.2% 0.2% 0.2% 0.2%Net Charge-offs (181,000) (205,250) (231,000) (284,000) -2.0% -2.2% -2.4% -2.8%

Interchange 371,429 408,571 464,286 520,000 4.1% 4.4% 4.9% 5.2%Association Fees (24,000) (26,400) (30,000) (33,600) -0.3% -0.3% -0.3% -0.3%Reward Expense (134,344) (164,199) (207,321) (258,000) -1.5% -1.8% -2.2% -2.6%Net Interchange 213,084 217,973 226,964 228,400 2.4% 2.4% 2.4% 2.3%

Fees 32,400 33,300 34,200 36,000 0.4% 0.4% 0.4% 0.4%

Processing Expense (262,500) (270,000) (277,500) (285,000) -2.9% -2.9% -2.9% -2.9%Marketing Expense (17,500) (18,000) (18,500) (19,000) -0.2% -0.2% -0.2% -0.2%Internal Expense (175,000) (180,000) (185,000) (190,000) -1.9% -1.9% -1.9% -1.9%Net Income 365,484$ 373,523$ 375,664$ 397,150$ 4.1% 4.0% 4.0% 4.0%

36TRK ADVISORS

Year‐over‐Year Changes Matter

Other Potential Views• By vintage (by age of account): see if new accounts are 

performing as well as old accounts

• By member segment: many different strategies out there, match to yours

• By member age: Millennials are critical, how do they perform once you have them?

• By state: multi‐state clients see important differences

• Deep vs. limited relationship cardholders

(Finally, a place where In‐House processing helps!)37TRK ADVISORS

How To Be The Teacher’s Pet

• Picture a single Excel tab to house all data

• Sections for each product with rollup at the bottom for portfolio total

• Each section has all the data lines going down the left side of the page

• Data only, no formulas on this page!

• Months across the top. Best to have at least 2+ years trailing 

• MUCH better to input data in one sheet and use it to populate reports than hard code into reports.

38TRK ADVISORS

Sound Model Building Tips

39TRK ADVISORS

Picture ThisJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Low Rate ProductBalancesRevolving BalancesTotal AccountsActive AccountsPurchase $……

Reward ProductBalancesRevolving BalancesTotal AccountsActive AccountsPurchase $……

Signature/WorldBalancesRevolving BalancesTotal AccountsActive AccountsPurchase $……

Business CardBalancesRevolving BalancesTotal AccountsActive AccountsPurchase $……

Total PortfolioBalancesRevolving BalancesTotal AccountsActive AccountsPurchase $……

2018 2019

How It Helps You Manage• Identify changes in cardholder behavior over time

• Identify and dimension opportunities (e.g. inactive accts)

• Differentiate by product, focus activities, save $

• Analyze marketing effort results on key drivers

• The data set is a great tool for quick ad hoc analysis

• Show what you contribute, fix if needed

• Anchor conversations around reward value in FACTS 

• Stop vague, ill‐sourced impressions from derailing what is needed. Support a choice based on facts and priorities!

40TRK ADVISORS

More Than Just Counting

• Average CU ROA in 2018 = 1.0%. 

• Example credit union: Card is 5% of assets with 6% ROA

• A little algebra: What is the CU ROA without card?(5.0% of assets  x  6.0% ROA)  +  (95% of assets  x   ? %)  =  1.0%,   or

95% of assets  x  __% = 1.0% ‐ (5.0%  x  6.0%)    or   

? % = 1.0% ‐ (5.0%  x  6.0%)95%

The answer is 0.74%. Without card CU ROA = 0.74%. 

• Card is 26% of all earnings, despite being 5% of assets.

41TRK ADVISORS

The Punch Line! My favorite part!

DO MORE CARD!

42TRK ADVISORS

2019 Online Card School

April  10 CARD MARKET OVERVIEW

June  20 CALCULATING PROGRAMPROFITABILITY (& USING IT)

Sept 5 MAPPING PRODUCTS TOMEMBERSHIP EXPECTATIONS

Oct 17 MATCHING PRICING & PRODUCT VALUE TO RISKLEVELS

CO‐OP Clients 3 Year LibraryAll Slides

All Recordings

Live Sessions Open to All

43TRK ADVISORS

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