Credit union CEOs Mark Zeigler and Colin Anderson get together for lunch about once a month.

They have a lot in common – both lead mid-sized credit unions in the Knoxville, Tenn., market and in fact, their headquarters are just a mile apart in nearby Oak Ridge.

They could be regarded as competitors, but they are also collaborators.

In 2013, Zeigler came to Y-12 Federal Credit Union ($1.2 billion in assets, 113,517 members), which is named after the code name for one part of the sprawling complex that was part of the Manhattan project that helped produce the first atomic bombs during World War II.

In 2015, Anderson became president/CEO of ORNL Federal Credit Union ($1.9 billion in assets, 157,463 members), which was formed for employees of the Oak Ridge National Lab in 1948.

Their launch of two CUSOs in 2015 was recognized in April by NACUSO with its Collaboration and Innovation Award.

In May, the credit unions rebranded the two co-owned CUSOs as 7 Title and 7 Insurance. An ORNL-owned CUSO, CU Community, was rebranded as 7 Mortgage.

The name recognizes the seven principals of cooperatives. The CUSOs allow the credit unions to provide savings and better service not only to their members, but to others in the community.

At ORNL, CUSO investments rose from $3.3 million, or 0.24% of assets, in 2011 to $8.9 million, or 0.46% of assets, in September. At Y-12, investments grew from $1.2 million, or 0.19% of assets, in 2011 to $3.5 million, or 0.31% of assets, in September.

For decades, credit union service organizations have been the legal entities through which credit unions pool money, time and personnel to solve problems that would be difficult or impossible to do alone.

“Sometimes CUSO solutions come together quickly, and provide an answer to a marketplace challenge or opportunity. Other times it takes longer, and sometimes too long,” Jack M. Antonini, NACUSO's president/CEO, said. “They're competing with these giant banks – Wells Fargo, J.P. Morgan Chase, Bank of America and Citibank – any one of which is larger than our entire industry.”

CUSO investments and loans are a growing, but still tiny part of the overall balance sheet for credit unions.

In 1992, CUSO investments and loans represented 0.07% of assets, and took until 2002 to hit 0.10%. The pace picked up over the next five years, and hit 0.22% by the end of 2007. CUSO investments diminished during the Great Recession, but began picking up again in 2010 when they recovered to 0.22%. It was 0.25% in June, up one basis point from a year earlier.

As of June, 2,261 of the 5,815 federally-insured credit unions had investments in at least one CUSO. They accounted for 88% of all credit union assets – up from 80% of assets five years earlier.

That reflects the huge disparity in size. The average CUSO-investing credit union in June had $530 million in assets and 41,700 members, while the average non-participating credit union had $47 million in assets and 4,600 members.

Generally, larger credit unions perform better financially than smaller ones, and that trend follows with CUSO participants.

NCUA records showed assets per full-time employee grew at 2% a year for both groups from 2011 to 2015. Since then, however, the CUSO-invested group has increased that measure at a pace of nearly 3% a year while it rose less than 1% among those without them.

According to Callahan & Associates, annualized ROA for the nine months that ended Sept. 30 was 0.81% for credit unions with an investment in a multi-owned CUSO, compared with 0.62% for others. Callahan also found noninterest income was 1.38% of assets for credit unions with a stake in a multi-owned CUSO, compared with 1.14% for those without a CUSO stake.

Among the nation's 1,100 CUSOs one of the nation's oldest and largest is PSCU, founded in 1977 in Tampa, Fla., by five credit unions that wanted to start offering credit cards.

It added a call center in the late 1980s, when having 24/7 operations became a member expectation. It expanded to help credit unions with financial services, core processing, debit cards and online bill payments. Most recently, it has been helping credit unions move into providing EMV chip cards.

PSCU now has 1,900 employees and 850 owners across the country with nearly 40 million members.

“CUSOs are critical to the credit union movement,” Dean Young, PSCU's SVP of relationship development, said. “People do business with people they trust. Being so aligned with our market allows us to walk in the door and be a trusted partner.”

PSCU has returned about $490 million in dividends to owner credit unions since 1994, about half of it in cash. The return on investment for credit union investors is more than 20%.

Credit unions engage with CUSOs not only to handle the increasing complexity of known tasks, but to anticipate future challenges, Young said.

“We have a whole team devoted to poking and prodding into the emerging technologies to make sure that we fulfill the expectations of our credit unions,” he said. “We're always looking at what's next.”

Guy Messick, a Philadelphia-based lawyer specializing in helping credit unions form CUSOs for the past 35 years, said the most important issues many credit unions face are governance and raising capital. Three questions credit unions need to answer carefully include:

1. Who can own part of the CUSO? If a non-credit union is among the partners, recognize that entity has a profit motive that might conflict with the CUSO. This also means having an exit strategy to allow an unhappy credit union – or a credit union creating unhappiness – to leave.

2. How will profits and losses be shared? Credit unions need to understand losses are part of its risk.

3. Who will have the power to manage the CUSO? The board should include each credit union's CEO or at least a senior executive so decisions can be made with authority and without wasting time.

Often credit union executives don't understand that being part of a CUSO will probably require some change if efficiencies are going to be realized. They have to adopt practices and standards that are shared among the members.

“You're branching out into a new way of doing business. Things have to operate within the credit union differently,” he said.

And some credit unions, usually smaller ones, refuse to see the benefits of engaging CUSOs at all. “The world is changing so quickly, and the world is not waiting,” he said. “You can't put this off anymore.”

One of the small credit unions that has embraced CUSOs is Element Federal Credit Union in Charleston, W.Va. ($31.5 million in assets, 4,321 members).

Linda Bodie, who lists her title as “chief + innovator,” started at the credit union 19 years ago when it had one office, three employees and was called WV United FCU.

It bought its first branch location in 2007 in Kanawha City, changed its name in 2012 and opened a third branch in South Charleston in 2013. It now has 16 employees.

Element's first big exposure to CUSOs was though joining CO-OP to participate in its shared branching network. In 2010 Element joined CU*Answers to convert its core processing. Through her membership on the board, she saw how CUSOs worked together.

“That's when I really learned the power of CUSOs,” Bodie said.

She has since expanded the credit union's use of CUSOs to include services such as accounting, auditing, compliance, data analytics, marketing and website development. It's through CUSOs that Element is able to provide members online bill payments, person-to-person payments and text banking.

“We do a lot for our size because of the CUSOs,” she said. “We don't have to hire the expert staff for some functions that others can do for us at a much cheaper price. And they don't call in sick and they don't quit.”

“It's reassuring to me. It takes a lot off my plate and doesn't keep me up at night,” she said.

Instant Insights /

CUSO Investments Slowly Spreading

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