Leveraging the Profits Made by CUSOs
The primary advantage to using a holding company CUSO is a consolidation of CUSO investments and leveraging the profitable CUSOs to make additional CUSO investments.
A federally chartered credit union may only invest up to 1% of its assets in CUSOs in the aggregate. However, NCUA defines CUSO investment as the actual invested dollars or assets from the credit union and not any increase due to the CUSO’s profitability. Therefore, putting a holding company in the middle of the credit union and the service CUSOs allows the profits of one CUSO to flow up to the holding company and be used to fund another CUSOs operations or to make additional CUSO investment without tapping into the credit union’s limited CUSO investment bucket.
For example, a credit union makes an investment of $10,000,000 in ten different CUSOs at $1,000,000 each. All ten CUSOs are successful and make a profit of $500,000. Due to the success, the credit union decides to invest in five more CUSOs at $1,000,000 each. At this time, the credit union has made CUSO investments of $15,000,000 in 15 CUSOs. This means that if the credit union has a CUSO investment limit of $45,000,000 total, it has now dipped into that investment bucket and used $15,000,000 leaving $30,000,000 for future investments.
Instead, a credit union could make an investment of $10,000,000 in a single holding company and that company then makes investments in ten different CUSOs at $1,000,000 each. All ten CUSOs are successful and make a profit of $500,000. Due to the success, the credit union decides to invest in five more CUSOs at $1,000,000 each except it does so again through its holding company. The holding company uses the $5,000,000 in profits from the first ten CUSOs and the credit union does not invest any additional cash in the holding company. At this time, the credit union has made a CUSO investment of $10,000,000 in the holding company which owns 15 CUSOs. This means that if the credit union has a CUSO investment limit of $45,000,000 total, it has now dipped into that investment bucket and used $10,000,000 leaving $35,000,000 for future investments.
Therefore, profitable CUSOs can be better leveraged to make additional CUSO investments through the use of a holding company CUSO. Note that the credit union, through GAAP and consolidated financials, is still able to recognize the value of the holding company CUSO and its investments without the need to distribute cash back to the credit union.
Consolidating CUSO Management
Having a holding company CUSO requires potentially adding bureaucracy and governance to your CUSO management. A holding company CUSO is another company and another board to manage. In addition, a holding company CUSO may add additional legal and financial administration costs, such as filing fees and accounting costs. However, the credit union can construct the holding company CUSO to minimize the governance concerns, minimizing the pains of multiple boards and disparate governance of all CUSOs.
For example, you might have five board members at the holding company CUSO level, all of whom are senior staff of the credit union. The holding company CUSO would be the investor in all other CUSOs. The boards of any subsidiary CUSO would mirror the board representation of the holding company CUSO. Board meetings could be held at the same time, consecutively. The underlying day to day management of each subsidiary CUSO would be delegated to an employee with direct business knowledge of the CUSO services. Finally, a representative of the holding company CUSO would be the liaison with the credit union board on CUSO matters to keep them informed and to coordinate the CUSO services to better serve the credit union and its members. I highly recommend that the credit union CEO serve on the holding company CUSO board and be that CUSO liaison to the credit union board. The process of consolidating boards may raise questions of corporate separateness due to the intermingling of the same individuals on the CUSO boards. The reason corporate separateness is important is to limit the liability of the owners of a company from claims made against the company. A claimant may seek to sue the owners of a company for the actions of the company because the owners have deeper pockets than the company. Courts look at many factors to determine if the owners are liable for the actions of the company, and one of those factors is similar management. However, similar management is only one factor of the many courts will examine and a court is extremely unlikely to allow a claim against the owners of a company if the company fails to comply with this one factor. In fact, most all small companies (i.e. family businesses) will have similar management. Furthermore, NCUA has addressed this issue by suggesting that a CUSO board not be comprised of a majority of credit union directors, and instead, be comprised almost entirely of credit union employees with more operational knowledge.
Therefore, it is not likely to be a problem for the CUSO boards to have the same boards so long as the companies continue to follow the other factors of corporate separateness. The major factors are: maintain adequate capital/insurance, keep separate books and records, and keep separate operating accounts.