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CARLSBAD, Calif. – After doing business for the past 15 years as a broker/dealer CUSO owned primarily by Xerox FCU, XCU Capital Corp. is about to embark on a new phase in its history. If things go as planned and as XCU Capital President/CEO Mark Allen hopes, Xerox FCU will share its ownership with other credit unions and the CUSO will be jointly owned by 14 CUs. It’s a bold move for the 15 year-old CUSO that has grown to manage over $800 million in assets for over 22,000 clients representing Xerox FCU and six other direct clients -Affinity FCU, Bedminster, N.J.; Advancial FCU, Dallas, Texas; Eli Lily FCU, Indianapolis, Ind.; Michigan Educational CU, Livonia, Mich.; Members Alliance FCU, Columbus, Ga.; Northeast CU, Portsmouth, N.H.; – and four indirect clients. The strategy began in early 2000 when a group of 15 large credit unions, including Xerox FCU, brainstormed on the best way to build and grow their long term investment picture. The group contracted with Diversified Services Group out of Philadelphia, Pa. to conduct an independent assessment of five credit union broker/dealers in select categories – XCU Capital, CUNA Mutual, LPL, CFS and FNIC – to determine an optimal, long term plan for the credit unions to integrate financial services. Since all of the credit unions were already doing business with any one of the five dealers, the companies had an equal chance of being chosen by the credit unions. The study looked at issues such as ownership opportunities with a board position within the broker/dealer; gaining economies of scale; sharing development costs with an emphasis on aggregation and linked accounts; and retaining individual credit union identities and control of marketing to credit union members. While the study considered several options for the CUs, it recommended ownership and majority control as the optimal method of operation. The study also evaluated the benefits of a cooperative operation compared to independent credit union partnerships – it recommended a joint operation. It also recommended the CUs purchase an existing broker/dealer, instead of starting one from scratch. When Diversified released its report in December 2000, XCU Capital was the recommended choice of the five dealer/brokers. Diversified followed up with two subsequent phases to the study to provide the credit unions with more details concerning how the cooperative broker/dealer arrangement would work and how it would come together structurally. “The credit unions’ objective is to own a broker/dealer rather than rent one, so that they have the necessary control,” said Allen. As the majority shareholder of XCU Capital with 99% ownership (Michigan Educational CU owns the remaining 1%), the CUSO provided broker/dealer services exclusively to Xerox FCU for the first seven year it was in business. Allen said Xerox is open to sharing ownership of the CUSO with other credit unions “under the right conditions.” The majority ownership in XCU Capital in fact was a critical component in Diversified Services Group’s recommendation. Before the study was conducted, XCU’s Board wasn’t interested in selling a majority interest, but preferred to retain control of the CUSO. The Board reviewed and reversed its position once it had the opportunity to review the results of Diversified’s study. Allen said XCU is in the process of negotiating the conditions acceptable to Xerox FCU and the board. Beyond that, Allen said the exact percentage of ownership each of the credit unions will have in XCU Capital still has to be decided, and it may end up with the credit unions having an unequal percentage of ownership in the CUSO. One things is certain though, said Allen: the credit unions will share the control of the CUSO. Even while XCU’s Board continues to work out the terms of ownership, the CUSO is proceeding with the conversion. Allen said the conversion check list is about 50 pages long, and the conversion is proceeding “just like any other conversion where you have to move assets and capital to another company, in this case XCU Capital.” Allen is hopeful the cooperative partnership will be solidified by the end of the year .The timing, he said, will depend on each credit union’s contractual relationship with their broker/dealer and their ability to terminate their relationship in accordance with their contract. – [email protected]

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