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

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

They could be regarded as competitors, but they are alsocollaborators.

In 2013, Zeigler came to Y-12 Federal Credit Union ($1.2 billionin assets, 113,517 members), which is named after the code name forone part of the sprawling complex that was part of the Manhattanproject that helped produce the first atomic bombs during World WarII.

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

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

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

The name recognizes the seven principals of cooperatives. TheCUSOs allow the credit unions to provide savings and better servicenot only to their members, but to others in the community.

At ORNL, CUSO investments rose from $3.3 million, or 0.24% ofassets, 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, in2011 to $3.5 million, or 0.31% of assets, in September.

For decades, credit union service organizations have been thelegal entities through which credit unions pool money, time andpersonnel to solve problems that would be difficult or impossibleto do alone.

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

CUSO investments and loans are a growing, but still tiny part ofthe 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 nextfive years, and hit 0.22% by the end of 2007. CUSO investmentsdiminished during the Great Recession, but began picking up againin 2010 when they recovered to 0.22%. It was 0.25% in June, up onebasis point from a year earlier.

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

That reflects the huge disparity in size. The averageCUSO-investing credit union in June had $530 million in assets and41,700 members, while the average non-participating credit unionhad $47 million in assets and 4,600 members.

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

NCUA records showed assets per full-time employee grew at 2% ayear for both groups from 2011 to 2015. Since then, however, theCUSO-invested group has increased that measure at a pace of nearly3% a year while it rose less than 1% among those without them.

According to Callahan & Associates, annualized ROA for thenine months that ended Sept. 30 was 0.81% for credit unions with aninvestment in a multi-owned CUSO, compared with 0.62% for others.Callahan also found noninterest income was 1.38% of assets forcredit unions with a stake in a multi-owned CUSO, compared with1.14% for those without a CUSO stake.

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

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

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

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

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

Credit unions engage with CUSOs not only to handle theincreasing complexity of known tasks, but to anticipate futurechallenges, Young said.

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

Guy Messick, a Philadelphia-based lawyer specializing in helpingcredit unions form CUSOs for the past 35 years, said the mostimportant issues many credit unions face are governance and raisingcapital. Three questions credit unions need to answer carefullyinclude:

1. Who can own part of the CUSO? If anon-credit union is among the partners, recognize that entity has aprofit motive that might conflict with the CUSO. This also meanshaving an exit strategy to allow an unhappy credit union – or acredit 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 asenior executive so decisions can be made with authority andwithout wasting time.

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

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

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

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

Linda Bodie, who lists her title as “chief + innovator,” startedat the credit union 19 years ago when it had one office, threeemployees 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 SouthCharleston in 2013. It now has 16 employees.

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

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

She has since expanded the credit union's use of CUSOs toinclude services such as accounting, auditing, compliance, dataanalytics, marketing and website development. It's through CUSOsthat 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. “Wedon't have to hire the expert staff for some functions that otherscan do for us at a much cheaper price. And they don't call in sickand they don't quit.”

“It's reassuring to me. It takes a lot off my plate and doesn'tkeep me up at night,” she said.