Avia Collinder, Business Writer

FHC credit windows in every parish; mergers, South Florida market on the radar

First Heritage Co-operative Credit Union (FHC) has 10 offices open to members concentrated in five zones, but Chief Executive Officer Basil Naar says in five years, he plans to have at least one credit window in each parish.

It means opening up another 10 service points, Naar tells the Financial Gleaner in an interview that also disclosed plans by the community bank to tap foreign markets for business.

Two-month-old FHC is today Jamaica's second-largest credit union, with J$8.3 billion of assets - a standing it achieved as the outcome of the merger of the Churches and GSB credit unions at mid-year.

The merged operation has seven branches and three sub-branches in Kingston and St Andrew, Montego Bay, Clarendon and St Catherine.

Naar says additional growth will be sought through other mergers, but that FHC's more immediate focus is the introduction of micro credit-lending facilities and three new full-service branches in St Ann, Westmoreland and St Thomas.

"Our intention for the medium and long term is to expand microloan facilities to every parish (by December 2014). We are planning also an additional three branches by 2015," he said.

"However, we are seeking other mergers with other credit unions. Growth can be organic or through mergers."

FHC's merger targets includes credit unions with "a stable bottom line" and whose members are demanding products and services that FHC has to sell, but the acquisition target lacks.

"We have a technology and operational and financial infra-structure which we believe is the best in movement," said the community banker.

"Most cannot lend as much as J$10 million to one member, who then turn to commercial banks. We have a cap of J$60 to J$70 million."

FHC has 11 categories of loans. Motor-vehicle financing is the most lucrative, accounting for 30 per cent of the total loan portfolio, but Naar says he plans to push for aggressive growth in the business and microloans segments.

The two categories of commercial loans have grown to J$1 billion over the past three years, and now accounts for 17 per cent of FHC's J$6.3-billion loan portfolio.

Microloans are capped at J$500,000, but the average amount borrowed is about J$80,000, while the average business loan is J$750,000, with up to 15 years to repay.

Naar said FHC's model is more customer-focused rather than guided by the profit motive.

"We give our clients the benefit at the counter; it is not for shareholders at the end of the year," he said. "The bottom line will never be like a commercial bank, but that's not our business."

The projected investment in the nationwide expansion - in plant and administration - costs J$2 million per credit window and J$3 million per branch, the CEO said. The combined investment, by Financial Gleaner estimates, will be shy of J$30 million over two years.

Other spend has been projected for staff training and branch upgrades to improve customer accommodations. The big-ticket item for 2013, however, is marketing spend, with $30 million budgeted to push the brand and promote FHC's wealth-management subsidiary, CCU Investments Limited, in South Florida, where Naar says, there is interest in the products.

To date, FHC has spent some J$40 million on the merger, including marketing, advertising, internal branding and accommodation for staff.

Both short- and medium-term spend will be financed from cash flow or from a line of credit with the Jamaica Cooperative Credit Union League, whose financing is "below market rates", Naar said.

The new credit union is projecting a surplus of J$100 million this year - 90 per cent from loan income - but more than twice that at J$250 million in 2013.

The remaining 10 per cent of income, outside of loans, comes from investments in GOJ paper securities.

"We have always funded what we do from cash flow. The emphasis is not from making massive income, but just enough to maintain and grow business. We judge our returns by net income and growth in membership, which is now 150,000. We expect to grow by 450 members per month, which is a conservative estimate," Naar said.

At the 450 rate, the company expects to grow its membership membership base by around 27,000 over five years.

FHC has no plans to go to the equities market for financing, nor tap debt from the traditional banks.

"We have lines of credit with our League, which we can draw on at any time and structure over 10 years. We can currently access J$300 million at below market rates. We don't need to go out and borrow."

In 2011, COK Sodality, FHC's chief competitor for the non-bonded credit union market, chose to tap equity funding with a J$300-million deferred share issue. The proceeds financed COK's deeper foray into the mortgage and microloans markets.

FHC currently holds second place as the largest credit union, but Naar says it is now the largest non-bondholding body.

The top dog, Jamaica Teachers' Association Co-operative Credit Union, with more than J$9 billion in assets, is limited to teachers only.

"For the next 12 months, our major investment will be in people. You can put a strategic plan on the table, but unless you are investing in people, it makes no sense," said Naar.

He has a J$5-million budget for staff training and improvements to customer-service desks in two branches.

Asked about the expected impact of his programme, Naar said: "It's very difficult to assess a return. You are building a brand, laying a groundwork for attracting business. We expect to see returns in five years."

As for the prospects in the South Florida market, he said FHC was bullish "because we have been getting queries about our investment products and pension plans."

The FHC's pension fund has 4,000 members, he adds.

The Churches-GSB merger was the latest in a line of credit union marriages in three years, as players in the sector position to meet more stringent capital adequacy rules to be applied by their new regulator, the Bank of Jamaica.

FHC is capitalised at $1.5 billion, "which takes us above the BOJ requirement. We are, therefore, able to take J$25 billion in deposits," Naar said.

The credit union's assets are split $450 million in real estate, J$1.3 billion of cash and other reserves, loans of $6.3 billion, and 'other assets' valued at J$190 million.

Naar notes that there have been no significant management changes in the merged structure, although general managers have now been assigned to different portfolios.

There is a GM each for retail and customer service; operations and IT; finance; human resources; for each subsidiary; mortgages; and for the only new office - Strategic Planning and Corporate Affairs.

"You can't run a business that meanders. You need to measure everything you said you were going to do - overseeing both plans and the people in charge of them," said Naar, explaining the new management structure.

Courtney Lodge, former CEO of GSB, is now FHC's deputy CEO in charge of group operations. Naar as CEO oversees subsidiaries and finance.

business@gleanerjm.com