1
Access of New Jersey Federal Credit Union
(in formation)
Business Plan
As of October 16, 2018
Contents
I.Environment
A.Macroeconomics
II.Industry
A.Credit Union characteristics (vs. banks and thrifts)
1.Member-owned
2.No Capital Stock
3.Volunteer Boards
Unlike banks, credit unions rely on volunteer, unpaid boards of directors whom the members elect from the ranks of membership.
4.Not for Profit
5.Restricted “Fields of Membership”
B.Credit Union Industry Structure
1.By number
C.Credit Union Industry Support Structure
1.Trade Groups
2.Advocates
3.Advisors
4.Researchers
5.Regulators
D.Products and Services
1.Deposit-related
2.Investment-related
3.Credit-related (Loans)
4.Non-credit-related
5.Service-related
E.Regulations
1.Loans to Shares (Deposits)
2.Capital Adequacy
3.Member Business Lending (MBL)
4.Assets
5.Debit Interchange Fee
F.Issues
1.Tax Exemption
2.Housing Finance
3.Capital Requirements
4.Debit Card Interchange Fee
5.Government Supported Enterprises (e.g., Fannie Mae, Freddie Mac)
The long term health and viability of the secondary market is a paramount concern for credit unions as the Government-Sponsored Enterprises provide a vital source of liquidity to the industry.
6.Dodd-Frank Act
7.The Durbin Amendment (Debit Card Interchange Fees)
8.Corporate Credit Unions
9.Access to Alternative Capital
G.Performance
1.Industry As A Whole
2.By Size of Credit Union (by Asset Group)
H.Outlook
1.Loans
2.Earnings
III.Market
A.New Jersey
1.Individuals with Psychiatric Disabilities (“Consumers”)
2.Families
3.Mental Health Professionals
4.Mental Health Agencies
5.Corporations
6.Allies
B.New York
C.Nationwide
1.The Underbanked
2.The Poor
3.The Disabled
IV.Competition
A.Banks
B.Credit Unions
1.New Jersey
2.New York
V.Customer
VI.Company
A.FIN/ Finance
1.Investments
2.Tools
B.GOV/ Governance
1.Board
2.Advisory Committee
C.MAN/ Management
D.OPS/ Operations
E.STR/ Strategy, Tactics, and other considerations
1.Investment in Technology
2.The Size Question
3.The Growth Question
4.Board Recruitment and Involvement
5.Succession Planning
F.RES/ Research
1.Interesting Comparables
2.Possible Partners
VII.Products
A.Cash Products
1.ATM access
B.Credit Products
1.Loans
2.Credit cards
C.Interest Rate Products
1.Savings Accounts
2.IDAs
D.Service Products
E.Technology Services
1.Online Banking (with Intuit)
2.Mobile Banking
F.Inducements
1.Free gas cards
VIII.Finance
I.Environment
By “environment”, this plan does not mean the ecological environment. Instead it means the general economic and political environment in which the proposed credit union would operate.
A.Macroeconomics
Since the 1970s, American households have been borrowing more and saving less. The dramatic increases and more recent lesser reductions of household debt in the 2000s are noted. The very low savings rate and the still high borrowing rates have implications for all American financial institutions, including credit unions.The image below shows the overall comparative trends.
Source: Credit Union Magazine[1]
The now well-known difficulties of the American economy around 2008 led to a massive government response of borrowing, stimulus spending, and so-called pump-priming. As the image below shows, the monetary base has been vastly increased in 2008. This significantly increased monetary base may bring inflationary pressures in the longer term, while offering product development opportunities in the shorter term. Credit unions and other financial institutions must adjust to this new operating environment for the foreseeable future.
Source: Credit Union Magazine[2]
II.Industry
The credit union industry is a small but distinct component of the overall American financial system. By assets it constitutes about 6.7% of the total system.
A.Credit Union characteristics (vs. banks and thrifts)
1.Member-owned
Unlike the private stock basis of banks, credit unions are member-owned and very democratically governed. Each member, regardless of his number of shares (deposits) is entitled to one vote in selecting board members and in certain other decisions.Although other mutual institutions are also member-owned, voting rights are generally allocated according to the size of the mutual member’s deposits, rather than being “one member, one vote.”[3]
2.No Capital Stock
Credit unions do not issue capital stock. Credit unions create capital, or net worth, only by retaining earnings. Most credit unions begin with no net worth and gradually build it over time.[4]
3.Volunteer Boards
Unlike banks, credit unions rely on volunteer, unpaid boards of directors whom the members elect from the ranks of membership.[5]
4.Not for Profit
Credit unions operate as not-for-profit institutions, in contrast to shareholder-owned depository institutions. All earnings are retained as capital or returned to the members in the form of interest on share accounts, lower interest rates on loans, or otherwise used to provide products or services.[6]
5.Restricted “Fields of Membership”
Credit unions may only accept as members those individuals identified in a credit union’s articulated field of membership.A field of membership may consist of a) a single group of individuals that share a common bond, or b) more than one group, each of which consists of individuals sharing a common bond, or c) a geographical community. A common bond may take one of three forms: an occupational bond applies to the employees of a firm; an associational bond applies to members of an association; and a geographical bond applies to individuals living, working, attending school, or worshiping within a particular defined community.[7]
A multiple common bond credit union holds more than one occupational or associational common bond or a combination of both types of common bonds. (Community common bonds may not be part of a multiple common bond federal credit union.) According to the U.S. Treasury Department, nearly half of federal credit unions have multiple common bonds, but hold 71% of federal credit union assets. Of the institutions organized around a single common bond, most serve particular occupational groups. Occupational bonds accounted for 31% of all federal credit unions and 16% of federal credit union assets.[8]
B.Credit Union Industry Structure
1.By number
Since 1935, when President Roosevelt signed legislation enabling the credit union industry, the number of credit unions rose steadily until reaching a peak in the last 1960s. Since then, the number of credit unions has declined as the industry has consolidated. Today there are about 7500 credit unions in the U.S.
Source: Credit Union National Association
The number of New Jersey credit unions, currently around 200, has seen a similar pattern of growth and contraction over the same period, as shown below. It is noted also that New Jersey’s credit unions are predominately federally chartered (as Access has applied to be) rather than state chartered.
a)By Total Assets and Number of Members
Since the last 1960s, when the number of credit unions peaked but then began to consolidate, total assets in credit unions continued to increase steadily.
Source: Credit Union National Association
The assets and number of members of New Jersey credit unions have seen similar growth over the same period, as shown below.
Source: Credit Union National Association
b)By jurisdiction
Credit unions can be chartered and regulated either at the Federal or state level.
(1)Federal
(a)Federally Chartered Credit Unions
Federally chartered credit unions (FCUs) obtain their charters from, and are regulated by, the
National Credit Union Administration (NCUA).Their member shares (deposits) are
insured by the National Credit Union Share Insurance Fund (NCUSIF), which is
administered by NCUA. As of June 2011, there were 4,534 FCUs, with total assets of $517.6
billion and a membership base of approximately 50.6 million.[9]
(b)Federally Insured Credit Unions
All FCUs are required to be insured by the NCUSIF. State-chartered credit unions in
some states are required to be federally insured, while others may elect to be insured by
the NCUSIF. The term “federally insured credit unions” (FICUs) refers to both federal
and state-chartered credit unions whose accounts are insured by the NCUSIF. Thus,
FCUs are a subset of FICUs. As of June 2011, there were 7,239 FICUs, with assets of
$942.5 billion and a membership base of approximately 91 million.[10]
(c)Privately Insured Credit Unions
Private primary share insurance for state-chartered credit unions has been authorized in
some states. Currently there are privately insured credit unions operating in nine states.
There is only one private insurance company (American Share Insurance of Dublin,
Ohio) offering credit unions primary share insurance and only one other private insurer
(Massachusetts Share Insurance Corporation) offering excess deposit insurance coverage.[11]
(d)Corporate Credit Unions
Corporate credit unions are credit unions for credit unions, also considered wholesale credit unions. Corporate credit unions provide investment products, advisory services, item processing and loans to theirmembers.
In 2009, the corporate credit unions experience an asset quality crisis as a result of the mortgage market debacle. As a result, the NCUA put the two largest corporate credit unions into conservatorship and began an industry-wide exercise of securing and recapitalizing these critical credit union industry intermediaries. As of June 2011, there were 26 corporate credit unions with assets of $62.4billion of which five were under conservatorship.[12]
(2)State
c)By Type
(1)Regular
A regular credit union is chartered under standard terms to serve standard fields of membership.
(2)Low-income-designated
A low-income-designated credit unionhas a majority of its members (or the majority of residentsin the community that the credit union serves) making less than 80 percent of the average wage for all wageearners (established by the Bureau of Labor Statistics), or having an annual household income that falls at orbelow 80 percent of the median household income for the nation (established by the Census Bureau).[13]Low-income-designated credit unions enjoy special access to certain supplemental capital programs offered by the NCUA. Because most individuals with psychiatric disabilities quality as low income, Access is applying to be a low-income-designated credit union.
C.Credit Union Industry Support Structure
1.Trade Groups
a)National Association of Federal Credit Unions (NAFCU)
The National Association of Federal Credit Unions is a trade association that exclusively represents the interests of federal credit unions before the federal government and the public. Membership in NAFCU is direct; there are no state or local leagues, chapters or affiliations standing between NAFCU members and the NAFCU headquarters in Arlington, VA. NAFCU has nearly 800 members and represents 62% of total Federal credit union assets and 58% of all FCU member owners.[14]
2.Advocates
a)Credit Union National Organization (CUNA)
CUNA is the largest American advocacy organization for credit unions, representing 92% of CUs nationally. CUNA provides members with information and resources and published Credit Union Magazine.
b)National Credit Union Foundation (NCUF)
As a philanthropic and social responsibility leader of America's credit union movement, the National Credit Union Foundation (NCUF) raises funds, makes grants, manages programs, and provides education empowering consumers to achieve financial freedom through credit unions. NCUF was started by and maintains close links to CUNA.
c)National Federation of Community Development Credit Unions
Established in 1974 by a coalition of credit union leaders dedicated to revitalizing low-income communities, the Federation's mission is to strengthen those credit unions that serve low-income, urban and rural communities, known as community development credit unions or CDCUs. NFCDU also provides consulting and technical service assistance to CDCUs in formation. Access considered itself to be a community development credit union and has had contacts with NFCDU.
3.Advisors
a)Credit Union Retired Executives
CURE is a new online advisory service established in 2009 by CUNA.
b)Credit Union Executives Society (CUES)
CUES is a membership society of credit union executives. It publishes Credit Union Management Magazine.
4.Researchers
a)Filene Research Institute
The Filene Research Institute is dedicated to scientific and thoughtful analysis about issues affecting the future of consumer finance and credit unions. Through Filene, leading scholars and consultants analyze managerial problems, public policy questions, and consumer needs for the benefit of the credit union system.
b)Callahan Associates
Callahan & Associates is a private Washington, DC consulting firm to the credit union industry. Its publications provide data-based insights and concrete solutions to credit union issues, helping credit unions to improve their financial performance and provide better value for members. (See
c)Cudata.com
cudata.com is a private subscription data service for credit union executives based in Provo, UT. See
5.Regulators
a)National Credit Union Administration (NCUA)
NCUA has a dual role as credit union deposit insurer and credit union regulator. The NCUA Office of Small Credit Union Initiatives, led by Ms. Tawana James.
b)National Credit Union Share Insurance Fund (NCUSIF)
c)National Association of State Credit Union Supervisors
D.Products and Services
1.Deposit-related
a)Savings
b)Checking
c)Certificates of Deposit
2.Investment-related
3.Credit-related (Loans)
a)Personal loans
(1)Payday loans
Payday loans are short-term loans secured by a future payment of a salary paycheck. In the credit union industry, about 75% of payday loans had tenors of two weeks or less, as shown below.
Payday Loan Composition, 2010
Source: Credit Union Magazine[15]
b)Home loans
c)Car loans
d)Credit cards
e)Education loans
f)Member Business Loans (MBL)
4.Non-credit-related
a)Money orders
5.Service-related
a)ATMs
b)Electronic services
(1)Balance inquiries and histories
(2)Bill payment
(3)Transfers
(4)Home banking
c)Financial education
d)Representative payee services
E.Regulations
1.Loans to Shares (Deposits)
2.Capital Adequacy
a)Equity/Total Assets
(1)“Well Capitalized” > = 7.0%
(2) “Complex / Adequately Capitalized” = 6.0% to 6.99%
(a)LT real estate loans > = 25.0% total assets
(b)MBLs outstanding + MBL commitments > = 12.5% total assets
(c)LT investments > = 15.0% total assets
(d)Loans sold with recourse > = 5.0% total assets
As an industry standard, a ratio of net worth to deposits of 7% is considered “well capitalized”.
3.Member Business Lending (MBL)
When Congress passed the Credit Union Membership Access Act (CUMAA) in 1998, it put in place restrictions on the ability of credit unions to offer memberbusiness loans. Congress codified the definition of a member business loan and limited acredit union’s member business lending to the lesser of either 1.75 times the net worth ofa well-capitalized credit union or 12.25% of total assets.[16] Thus lending by credit unions to business members is currently capped at 12.25% of assets, although member business loans under $50,000 do not count within this total. Legislation pending in Congress would increase this ratio to 27.5%.[17]
Specific regulations related to MBLs are listed below:
MBL loan balances < 1.75x Net Worth OR 12.25% Total Assets
Single borrower MBL < 15% TNW OR $100,000
All loans must be collateralized; Maximum Loan to Value of all liens < 80%, excluding MBL vehicle loans
MBL maturies <= 12 years
Waivers permitted on request to Regional Director
MBL credit analyst > 2 years direct experience
4.Assets
a)NCUSIF deposit = 1% of insured member shares
5.Debit Interchange Fee
F.Issues
1.Tax Exemption
Credit Unions are non-profit member associations which enjoy tax exemption. While there appears to be no serious challenge in Congress to this privilege at the moment, some in the credit union industry are concerned that the national budgetary woes could pressure Congress to abolish this exemption.
2.Housing Finance
3.Capital Requirements
Credit unions are the only financial services providerswith a capital regulation system for insured depository institutions that: a) relies primarilyon a static net worth ratio, rather than risk-based capital standards, in setting requiredcapital levels; and b) excludes potential sources of reliable capital that could strengthencredit unions to allow them to better meet the credit needs of consumers, contribute to theliquidity of the financial system, and support national economic growth and stability.[18]
4.Debit Card Interchange Fee
The Federal Reserve Bank has set a cap on debit card interchange fee of $0.21 plus 5 basis points of the cost of a transaction. According to the NAFCU, this is considered too low a fee for credit unions in light of the cost of operating a debit card system. Credit union advocates are asking for consideration especially for those entities with less than $10 billion in assets.[19]
5.Government Supported Enterprises (e.g., Fannie Mae, Freddie Mac)
The long term health and viability of the secondary market is a paramount concern for credit unions as the Government-Sponsored Enterprises provide a vital source of liquidity to the industry.
6.Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) and other regulatory changes since the beginning of the financialcrisis are generally aimed at abusive practices and exotic financial products. Nonetheless, the 253 new rules mandated by the Actwill impact virtually all financial institutions and will significantly increase the cost of compliance for credit unions.
7.The Durbin Amendment (Debit Card Interchange Fees)
The Durbin Amendment poses numerous challenges for credit unions. While the ultimate impact of the amendment cannot be judged before the Fed's rule-making, it will undoubtedly affect the profitability of the current credit union business model. While it will not be the make-or-break measure for most credit unions, it could ultimately affect the viability of some of the less profitable small or medium-sized credit unions.
8.Corporate Credit Unions
Reforming and stabilizing the corporate credit union system remains an ongoing issue for
the industry. In September 2010, the NCUA issued a final rule amending its corporate regulations. Among other issues, the rule significantly altered capital requirements and