The credit union industry's largest credit card company is looking for a rebirth, but its critics don't know if it can rise from the ashes of a dismal 1995.

Shrugging off a year of management upheaval and looking beyond a river of red ink, CUNA Card Services is optimistic that investors inside and outside the industry will perceive value in the enterprise.

But critics said it has yet to prove it's a good investment. They cite persistent problems in earnings and, possibly, leadership.

Keith J. Floen, senior vice president of CUNA Card Services, says it is moving in the right direction.

"We're really starting up a new company and entering several new lines of business," Mr. Floen said in an interview. "All of that involves start- up costs."

The Credit Union National Association, the industry's largest trade group, owns and controls Card Services through a for-profit subsidiary, CUNA Service Group.

CUNA Card Services, which works directly with credit unions and through some state leagues affiliated with CUNA, has 2,500 clients, representing five million cardholders and $5.5 billion in receivables.

Critics point out that Card Services planned to raise capital this year but couldn't - because of unexpectedly high losses.

Through the first eight months of the year, the unit's expenses outpaced revenues by $3.9 million, a loss slightly worse than was expected. Ominously, some CUNA sources said, the unit is sitting on even higher losses.

Worse, in October CUNA Service Group paid up to $5.4 million to buy out a contract with Alltel Information Services once it became apparent the Little Rock company couldn't fulfill a contract signed earlier that year.

More red ink is expected, Mr. Floen said. Losses are forecast for 1996 and 1997, though Mr. Floen declined to offer specific figures.

The organization plans to raise capital during the first and second quarters of 1996, but one close CUNA observer said the unit shouldn't court investors until it is in the black.

"They've got to stop the bleeding first," the source said.

Keefe, Bruyette & Woods is conducting an assessment of Card Services's value for the private placement, and Mr. Floen predicted the firm may set the unit's worth as high $70 million - the range of a valuation performed last year.

After Card Services receives the analysis in mid-January, it will set about raising as much as $30 million in capital, Mr. Floen said. In the first quarter the unit will offer stock to outside investors. In the second quarter it will ask state trade groups affiliated with the CUNA to buy additional stock.

The money is needed to pay for a palatial, $13 million state-of-the art headquarters recently completed in Madison, as well as a card embossing program and expanded card servicing and debit capability.

All of CUNA's affiliated state leagues, except Alaska's, currently are shareholders in CUNA Service Group. But there aren't any guarantees they will ante up for the capital-raising plan.

The Indiana Credit Union League, for one, doesn't plan to respond to any solicitations. The Hoosier State trade group recently switched to First Data Resources to do its processing.

"We believe we should be focusing our resources on our own credit card program," said John McKenzie, president of the Indiana association.

Although most state leagues support the concept of credit-union-owned credit card processor, and some said the unit is heading in the right direction, some states are going to need to be persuaded that Card Services is a good investment.

"I think there's some concern over the program and the stability of the long-term development of the program," said Daniel F. Egan Jr., president of the Massachusetts CUNA Association. "That's probably shared by a lot of people."

Beyond the red ink, Card Service's leadership, in light of recent setbacks, has caused concern for some in the industry and the trade group.

"The problems ... have been managerial," said one industry observer.

This year has been a hard one for the unit, highlighted by a processing contract debacle. After Banc One Financial Card Services balked at converting Card Service's clients to Triumph processing software, the unit hired Alltel Information Services to do the job.

But Alltel wasn't even able to move the software from Banc One on schedule, so in October CUNA Service Group bought out its contract for up to $5.4 million. This was tacked onto other losses incurred by delays in converting credit unions to Triumph.

The collapse of the Alltel deal led to the firing last month of Bradford L. Murphy, former executive vice president of fee-based services for CUNA. In part, it led to the October ouster of CUNA president Ralph Swoboda by CUNA board members angry over the unit's performance.

Industry and CUNA sources alike said that more due diligence should have been done before Card Services hired Alltel.

David L. Chatfield, president of the California Credit Union League, questioned - without naming names - whether Card Services' leadership had been up to the complexity of the task.

"In the credit union movement we've always tried to grow our own management talent and leadership," he said. "There may have been reluctance to bring in experts when experts were needed."

Mr. Chatfield noted that the California league was the second-largest investor in Card Services, after CUNA, and was interested in seeing it succeed. He said he supported the CUNA Service Group board's decision to bring in a yet-to-be-hired consultant to handle the capitalization.

But, he added, "there's a way to go to resolve some of the issues."

Mr. Floen said the attempt to go with Alltel was necessary once Banc One balked.

"We did the right thing at the time but you can go crazy second- guessing," he said.

Some industry sources have said that Mr. Floen may be on the outs down the line as well, even though John A. Gallagher, president of the Missouri Credit Union League and chairman of CUNA Service Group, publicly supported him.

Mr. Floen said he tries not to think about it.

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