The number of credit union subsidiaries offering nontraditional products like mutual funds and financial planning has surged in the last year.
And the for-profit, taxed subsidiaries are giving bankers a new gripe on top of their seminal ones about what they consider unfair competition from credit unions.
The federal government first gave its blessing to credit union service organizations in 1984.
Since then the number of credit unions starting such units has mushroomed. And credit unions' investment in such subsidiaries swelled 26% in the year ended June 30, 1995, the latest data available.
In June 1995, 1,252 credit unions had money invested in service organizations, according to figures from Sheshunoff Information Services. That was up 16% from the year before and 57% from 1992. The service organizations even have their own trade group, which expects the number of credit unions investing in them to double in the next few years.
Credit unions had $254.5 million invested in these subsidiaries in June 1995, according to Sheshunoff. The dollar amount invested actually dropped in 1994 but began moving vigorously upward again last year. While this investment is still a very small share, about 0.7%, of the institutions' total capital, it gives credit unions a significant new business - one that commercial bankers are increasingly confronting.
David Taber, chief executive of American River Bank in Sacramento, Calif., is braving competition in the broker-dealer arena from Golden 1 Credit Union, an institution 11 times the size of American River.
"They're very competitive in that area," said Mr. Taber, chief executive of a $135 million-asset institution.
Stan Hollen, chief executive of $1.5 billion-asset Golden 1, said his institution has been offering third-party broker-dealer services in an effort to be a one-stop financial center.
"If they're going to move their deposits, we'd like the opportunity to place the investments," Mr. Hollen said.
One of the more successful subsidiaries in the country belongs to Xerox Federal Credit Union, El Segundo, Calif. Last year, the five-year-old unit contributed 21 basis points to the credit union's bottom line, bumping its return on assets up to 1.24%.
Besides offering financial products to its members, the subsidiary sells investment services to five other credit unions and has a management contract with another institution. It plans to pitch the latter service to more small and medium-sized credit unions.
"We started it to position ourselves against the nontraditional financial providers that are taking away market share," said Kevin Foster- Keddie, chief executive of $311 million-asset Xerox Federal. "But now we're expanding from that role."
There are two kinds of service organizations, according to Robert Dorsa, president of the National Association of Credit Union Service Organizations, a Palm Springs, Calif., trade group.
Some are similar to the Golden 1 subsidiary, and Mr. Dorsa estimated about 400 such entities exist.
Credit unions generally fund these organizations by extending them credit, and the income generated for the parent comes from repayment of the loan.
The other CUSOs are joint ventures among credit unions that offer operational services such as credit card processing and jointly owned branches, as well as consumer services such as leasing. Mr. Dorsa said that fewer than 100 of this type exist but that several hundred credit unions have invested in them jointly.
Mr. Dorsa predicted dynamic growth for the joint ventures. Many credit unions are too small to put up the capital for their own subsidiaries but are willing to be shareholders with others.
"I expect the number of CUSOs" to go up "30% or 40% but the number of credit unions with ownership to double," he said. "Where I see the future is in more middle-range credit unions not necessarily starting CUSOs but buying into existing ones."
