Community first Guam Federal Credit Union.

Taylor, James J. ; Perez, Kimberly J. M.

CASE DESCRIPTION

The Community First Guam Federal Credit Union (Community First) case study illustrates how a company's business policy informs and directs its future. The case also demonstrates how a company needs to periodically evaluate changes in its business environment to determine how that may affect existing company policy. A significant discrepancy between the business environment and the objectives stated in a company's policy should lead to a reevaluation and reformulation of policy. In addition a major change in policy also requires changes in strategy and tactics. The Community First case shows a real world example of this kind of change. The case study is designed for students in an upper division course that includes learning about business policy, strategy, and tactics. The case requires two to three hours of outside preparation that would include reading the case and learning about basic credit union and banking practices. The case should take about one class period to cover.

CASE SYNOPSIS

Community First Guam Federal Credit Union opened for business in 1962--the first credit union on Guam. Initially Community First was called the NavMar Federal Credit Union (NavMar). NavMar specialized in service on Guam to its select employee group--members of the US Military and the Federal Civil Service. During the 1990s, NavMar's future was threatened by changes in the role of the military on Guam, a reduction in the federal bureaucracy, and the arrival on Guam of other more broadly based military credit unions. In 1997 in a successful policy initiative, Community First switchedfrom a charter based on its select employee group to a community charter that included all of Guam. This created a major change in its customer base. This represented a policy change that required significant changes in the institution's strategy and tactics. This case reviews these changes and how they were successfully carried out.

ROOTS OF THE COMPANY

Community First Guam Federal Credit Union was the first credit union established on the Island of Guam. Founded in 1962, it was originally named the NavMar Federal Credit Union. NavMar stood for Naval Forces of the Marianas and the new credit union initially served Guam's military community--the Navy, Coast Guard, Marines, and the Federal Civil Service. These limitations on the service population, called a select employee group, were an outcome of the intent of the founders and the original charter issued by the federal government in setting up the credit union. In September 1997, after extended discussion between the NavMar Board and management, Community First switched to a community charter. Up until October 2008, Community First was the only credit union to make such a switch on Guam. This switch allowed the credit union to extend membership to anyone living on Guam. Several years later, on October 1, 2000, the credit union formally changed its name to Community First Guam Federal Credit Union to reflect the transition to its community charter status. At the same time the credit union initiated a major upgrade to its strategic plan.

BUSINESS NATURE

Credit unions are cooperatives, owned and controlled by the members who use their services. A person becomes a member by depositing monies in a share account. Unlike common stock, where each additional share owned yields an additional vote, credit unions use a one person, one vote approach. By focusing on a narrower population base, a credit union is able to work with people who are often known to each other. This creates a personal environment in which members can both build their savings and also loan money to each other at competitive rates. This knowledge of the customer base often enables a credit union to make loans that would be considered too risky in other organizations. Unlike commercial banks, credit unions are not considered to be profit seeking organizations. Instead a credit union's central focus is service of its members. Because of this focus, credit unions are tax exempt. This exemption provides a strategic advantage, enhancing their ability to pay on deposits and loan funds at competitive rates.

Although credit unions are non-profit organizations, an inflow of money is still essential to support a credit union's services. Traditionally a credit union's principal source of funds for lending, making investments, and meeting liquidity requirements, comes from the share deposits of members. Positive cash flow at a credit union, as at all banking institutions, is built on net interest income - the difference between the interest and dividends the credit union pays to members on their deposits and the interest income the credit union earns on loans and investments. This difference allows the credit union to pay for administrative costs and support the expansion of the business. Credit unions also provide their members with deposit safety. Almost all credit unions participate in the National Credit Union Share Insurance Fund that guarantees deposits with the full faith and credit of the US Government. This is similar to the Federal Deposit Insurance Corporation that insures customer deposits at banks.

A credit union's legal status can be derived from a federal or state charter. This is similar to commercial banks which can also have a federal or state charter.

CHANGES AT COMMUNITY FIRST

The charter change at Community First was the outgrowth of the credit union's attempts to come to grips with the evolution of the credit union market on Guam. For some time NavMar had had competition. The Pentagon Federal Credit Union and The Naval Federal Credit Union, two of the largest credit union operations in the world, had opened branches and Automatic Teller Machines (ATMs) on the island, offering credit union services to the same select employee groups served by NavMar. Many potential NavMar customers would instead choose these credit unions because of their presence around the world. This would allow military personnel to keep the same credit union relationships even when transferred to different locations. Besides the Pentagon Credit Union and the Naval Credit Union, the GovGuam Employees Federal Credit Union (GGEFCU) opened shortly after NavMar and over the years developed a large presence on island. The many employees in the Government of Guam, and the number of family connections on Guam, provided an extensive potential customer base eligible for membership in the GGEFCU. Together these competing credit unions took a large chunk out of the customer base eligible for membership with NavMar.

At the same time, NavMar was faced with additional challenges. The US Government shut down the Ship Repair Facility (SRF) in the Guam harbor and initiated a series of studies of the military presence on Guam that could lead to a reduction in military forces on Guam. Among these were A76 studies that would determine whether or not certain large military operations such as the Post Exchange (PX) and Commissary operations on Guam could be privatized. This, combined with negative statements by some on Guam about the military's ongoing presence were seen as possibly leading to a reduction in military personnel on the island. By 1997, the Board and management of NavMar concluded that the credit union's future needed to depend on the entire population of Guam, rather than a select employee group such as the military. The proposed change to a community charter was fully approved.

Although the charter change was made in 1997, the credit union took several years before the NavMar operations fully reflected the changeover. In the time after the change in the charter, NavMar began the conversion process. Because of the change in the charter, NavMar could no longer have an immediate presence on the military bases. The credit union closed its branches on the military bases, consolidating operations at the central office in the city of Hagatna. The credit union also opened a northern office in Harmon and, to accommodate members living in the southern part of Guam, opened an ATM/Drop Deposit kiosk at the entrance of the main gate to "Big Navy" in Sumay.

The credit union's functional evolution took some years because of several obstacles. A decline in the military and civil service population was already becoming evident, challenging NavMar's customer base. In addition, the Asian monetary crisis of 1997 led to a downturn in the economies of a number of Asian nations, reinforcing negative economic issues already operative in Japan. This slowed Guam's economy which, besides dependence on the military, was also highly dependent on Asian tourism. In August of 1997 Korean Air Flight 801 crashed on Guam, killing 220 of254 passengers, affecting Korean Air service to Guam for several years. In December 1997 Super Typhoon Paka hit Guam directly, creating much damage that affected the economy. Finally in 1999, the American Bankers Association (ABA) sued the credit unions nationally in an attempt to turn back credit union regulations that had loosened eligibility requirements for credit union membership. US banks have to pay corporate taxes and were concerned about rules that could expand the credit union customer base, making them more competitive with banks. Because the NavMar changes involved an expansion of NavMar's customer base, NavMar needed to be especially sensitive to eligibility requirements until the suit was dismissed in 2001. Taken together, these major events slowed the NavMar changeover.

While this series of challenges affected the NavMar efforts, there were a number of issues that were closer to the credit union business that also affected the conversion. Opening its membership to all people living on Guam, without requiring participation in a select employee group, meant that NavMar now had to learn how to serve a very different group of customers made up of different cultures, ethnic backgrounds, financial needs, occupations, and professions. The military and the federal civil service had provided a homogenous customer base with which NavMar personnel had become comfortable and familiar. Greatly expanding its customer base meant that NavMar employees needed to broaden their point of view and their ability to serve and celebrate a much broader range of backgrounds and perspectives.

Despite the hold ups, NavMar management developed an extended plan for business change that focused on the year 2000. The key elements of this plan were:

1. A renewed emphasis on the customer service that was a central part of the credit union tradition. To credit union employees, people are supposed to be more important than money. The credit union considered itself to be a high touch organization, attempting to personalize all its interactions. Management concluded the credit union had been failing in this area. To help reach this service goal, management proposed additional training in customer service. As part of this reemphasis on a high touch approach, the credit union also planned to enhance other ways of interacting with customers including offering improved phone service and a new Website that would provide customers with additional ways of being in contact. Thus the credit union was willing to utilize technology to assist in customer support. This was also shown by the adoption of a comprehensive credit union management information system.

2. A consistent attempt to offer its members higher interest income on deposits and lower interest charges on loans compared to the competition.

3. The development of additional financial products, including a wider range of terms for certificates of deposit, overdraft options, and the offering of retirement plans.

4. An expansion of loan products including offering signature loans, auto loans, home mortgages, revolving credit, and business loans.

5. The offering of more business services such as wire transfers, money orders, travelers' checks, money orders, and the possibility of making utility payments.

6. The deliberate encouragement of members to utilize a full range of financial services. Being a high touch organization was intended to lead to customers with high utilization of credit union services.

NavMar was committing itself to offering any person on Guam more financial products at more competitive prices, using as much as possible a highly personalized approach to interacting with its customer base. Management concluded that by doing this, NavMar could be potentially competitive with any of the financial institutions operating on Guam.

NavMar management identified several advantages they thought the credit union had:

1. Senior management with a combined fifty years of service in the financial industry as well as over thirty years of credit union experience.

2. NavMar's community charter which allowed membership relationships across the population of the whole island.

3. NavMar's designation as a low-income credit union which allowed the credit union to serve small local business. In addition such a designation supported alliances with local banks who could meet federal Community Reinvestment Act (CRA) requirements though depositing funds with a credit union with such a designation.

4. A Credit Union Service Organization (CUSO) (a type of subsidiary that allowed for the development of additional customer services) already in place.

The updated plan was approved by the Board and in October 2000, in recognition of its new status and the enhanced policy goals that had been set, the NavMar Federal Credit Union was renamed the Community First Guam Federal Credit Union.

OUTCOMES FROM THE CHANGEOVER

Because of the change from a charter based on a select employee group to a community based charter, there was a drop in membership, from 11,800 members in 1999 to 6,800 members in 2004. Since then membership has grown to 7,800 members. These numbers however mask what was happening as there was an ongoing drop off in military and federal employee memberships that were being replaced by memberships from Guam citizens and residents. This is illustrated by the figures for total shares and total assets. Total shares started at $37 million in 1999 and remained relatively flat until 2007 when they began a climb to over $55 million. Total assets started at $41 million in 1999 and also remained flat until 2007 when they began a climb to over $65 million. The military shareholder with a lower deposit base was being replaced by a Guam customer with a higher average deposit.

Community First was also able to be competitive with its savings rates. The following table shows the credit union's competitive status with the local banking community as well as its close competitive status with it primary competition, the GovGuam Employees Federal Credit Union.

Perhaps the most important indicator of the success of the transition was that during the whole changeover, Community First remained profitable. In 2001 Community First reviewed its accomplishments as well as its strategy and goals. Management saw that all the initial goals associated with membership strategy had been reached. In addition Community First was offering a wider range of savings and investment programs including uninsured investments. Also reached were the initial training goals set out to help credit union personnel become a fully high touch, customer oriented operation. Finally a new goal was added, that of reviewing all positions with the objective of ensuring that Community First would be able to offer competitive wages and the opportunity for professional growth for its employees.

Over a period of three years, against significant external odds, Community First identified significant risks in its business environment and made major changes to its strategies and goals, enabling Community First to continue effective operation. It was a major business accomplishment on Guam or anywhere. Still no business can rest on its prior accomplishments. In October 2008, the GovGuam Employees Federal Credit Union announced that it was changing to a community charter. The implications for Guam's credit unions and banking business are still to be identified.

DISCUSSION QUESTIONS

1. What happened that made Community First decide it needed to make major business changes?

2. What resources did Community First have that supported the change process?

3. What operational changes did Community First need to execute its proposed policy change(s)?

4. Based on the elements of this case, define and differentiate the following business terms: policy, strategy, and tactics. Relate the definitions to this case. Note students are expected to use definitions from a variety of sources. Indeed it may be useful for the instructor to provide a list of three to five definitions for each term. The discussion of a variety of definitions is intended to be one of the ways of learning from the case. In this case study policy represents the long term determination of the direction of an organization. Strategy represents the focusing of organizational resources toward the accomplishment of policy. Tactics are the specific means chosen to carry out the strategy. As a result of studying this case students should be able to better identify policy, strategy, and tactics found in subsequent cases.

5. If you had been employed by Community First in the mid 1990's, would you have argued for choosing to more actively compete with the new military credit unions? Why or Why not?

6. How often should a company review its business environment? What ways would you suggest to ensure that such a review was being conducted?

7. One of Community First's objectives was to be a high touch organization. Was this choice a policy choice, a strategic choice, or a tactical choice?

8. If you had been at the center of the Community First change effort, would you have done anything differently?

CONCEPTS USED IN THE CASE

Cooperative Membership Organization

Select Employee Group

Community Charter

Customer Base

Net Interest Income

High Touch Organization

Taxation and Credit Unions

Taxation and Banks

Business Policy

Business Strategy

Business Tactics

REFERENCES

Branch, B. and Baker, C. Overcoming Credit Union Governance Problems-What Does It Take? Retrieved November 02, 2007 from <http://www.iadb.org/sds/doc/1714eng.pdf>.

Community First Guam Federal Credit Union. Financial Report for FY2006. December 31, 2006.

Community First Guam Federal Credit Union. Our History. Retrieved October 25, 2008 from <http://www. communityfirstfcu.com/ASP/history.asp>.

Community First Guam Federal Credit Union. Strategic Plan: 2000--2005, unpublished manuscript.

East Central Energy. What is a Cooperative? Retrieved November 15, 2007 from http://www.eastcentralenergy.com/about_coop.aspx>.

Interview. Cruz, G.A., President--Community First Guam Federal Credit Union. October 8, 2008.

Interview. Duenas, C., Financial Analyst--Community First Guam Federal Credit Union. October 26. 2007.

National Credit Union Administration. Credit Union Development. Retrieved October 28, 2007 from <http://www.ncua.gov/CreditUnionDevelopment.html>.

Wikipedia. Federal Credit Unions. Retrieved September 29, 2008 from <http://en.wikipedia.org/wiki/federal_credit_union>.

James J. Taylor, University of Guam

Kimberly J. M. Perez, University of Guam

Table 1: Savings Rates on Guam, 2006

                            3 MOS   6 MOS   12MOS   18 MOS   24 MOS

Community First Guam FCU    3.80%   4.55%   4.25%   4.10%    4.10%
GovGuam Employees FCU       3.55%   4.60%   4.75%   4.50%    4.55%
Bank of Guam                2.30%   2.60%   2.96%   3.07%    3.17%
Bank of Hawaii              1.00%   1.25%   1.65%   2.50%    2.90%
Bank Pacific                3.13%   3.25%   3.50%   3.75%    4.00%
First Hawaiian Bank         1.75%   2.00%   2.50%   2.75%    3.00%