CARLSBAD, Calif. – The notion of one credit union giving up the majority of its claim to a revenue-producing entity so that others may reap the benefits may seem a bit self-defeating but that’s exactly what Xerox Federal Credit Union recently did. As part of an agreement with XCU Capital Corp., the credit union reduced its ownership with the broker-dealer from 99% to 20%. The pulling away, expected to have taken up to seven years, has fast forwarded by 10 months said Mark Allen, XCU Capital’s president/CEO. Waiting to snatch up the available shares were Justice Federal Credit Union of Chantilly, Va., which acquired a 3% share in XCU and North Carolina Local Government Employees Federal Credit union which bought a 6.7% stake. “The big picture is if you don’t own the broker-dealer, then you don’t own the client relationships,” Allen said. “Yes, you may have a contract that allows you to transfer them, but many times you’re transferring to others that are not attuned to the credit union industry.” The shifts in ownership are just one thrust behind the growth of XCU Capital, a 100% credit union-owned broker dealer that launched in 1987 as a wholly-owned CUSO for Xerox FCU. XCU Corp., Inc. is the holding company for XCU Capital. Nearly 15 years later, nine of the nation’s largest credit unions have purchased 60% of the outstanding shares of XCU Capital doubling its number of clients to more than 50,000 and assets to $1.5 billion. In addition, Michigan Educational Credit Union raised its share from 1% to 6.7% and State Employees Credit Union increased its ownership from 6.7% to 11%. The nine credit unions – TRW Systems Federal Credit Union, Schools Financial Credit Union, Safe Credit Union, Premier America Credit Union, The Golden 1 Credit Union, Travis Credit Union, State Employees Credit Union of Raleigh, Mountain America Credit Union and WesCorp, the nation’s largest corporate credit union – certainly share a common goal of converting to a system that “understands the makeup of the credit union industry.” In 2000, a group of California credit unions commissioned Diversified Services Group, Inc., an independent evaluation of broker- dealer alternatives to recommend the best overall solution to meet the group’s unique needs. At the top of the critical-needs lis were ownership, operational control, the ability to develop new custom products and state-of-the-art broker-dealer services, said Bob Siravo, co-chair of the study group and CEO of Travis Credit Union. After a year of research, DSG recommended that the group enter into negotiations to purchase XCU Capital. When Allen became the firm’s CEO in 1991, XCU Capital had yet to extend services outside of the Xerox member base. At the time, the credit union had $1 billion in assets and 10 CUSO representatives. Still, with the downsizing of the well-known copy machine maker, the credit union and CUSO began to feel the pinch and reassessed what it would take to survive. “It was a matter of grow or die,” Allen said. “And, that may sound harsh but that was the reality.” Three years after Allen took the Helm, XCU launched an investment center at MembersAlliance Credit Union in Rockford, Ill. In 1997, Advancial Federal Credit Union, Michigan Educational Credit Union, Dearborn Schools Credit Union, Eli Lilly Federal Credit Union and Paragon Federal Credit Union would also sign on to offer investment services to members. Allen said the firm’s intention to grow at a slower-than-normal pace was deliberate. “We brought in maybe one or two credit unions a year and that’s it,” Allen recalled. “We were careful not to grow at the risk of destroying the service level. It was a very methodical approach rather than going out and gobbling everything up.” Once a credit union buys interest in XCU Capital, the conversion process generally depends on the cooperation of the former provider, Allen said, adding the intention is to space the conversion over a nine-month period so that the process “goes as smoothly as possible.” The actual buy-in and agreement takes about 60 days to process and the actual conversion can be as short as a weekend not counting the time for training and other support implementation. Over the next four years, XCU would add six more credit union partners including Michigan Educational Credit Union (formerly Wayne Out County Teachers Credit Union) being the first to buy a minority interest. By 1999, revenue topped the $4 million mark and assets under management exceeded $500 million. Since 2000, XCU has been in an upward spiral growth including launching a new equity investment program, online trading and online insurance, adding two more credit union partners and doubling its revenue to more than $9 million. This April, the firm rolled out its trust services division as part of estate planning outreach that also finds a growing number of select employee groups inquiring about 401k programs. Additionally, XCU’s money manager accounts have grown from 2% to 12% even though Allen says it’s not a major part of the firm’s business. At its long-range planning conference held in California in August, discussions began on the development of a platform annuity program. Surprisingly, Allen admitted, XCU’s Focus Insurance Agency Inc. is seeing more appeal from many of XCU’s larger credit unions, mostly because they are interested in aggregating insurance products. While the fruits of two years of research and labor are just beginning to reach peak season, Allen said through it all, he is pleased with the outcome thus far. “It’s always a challenge when you bring a lot of people together in a short period of time,” Allen said. “I have to say with all honesty that the groups have come together and the swiftness of the boards’ decisions have helped to get everyone on the same page.” -

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