Beyond buying banks: Other strategic growth opportunities for credit unions
Since credit unions were established in the U.S in 1908, they have fulfilled their mission by providing financial services to their members. Over time, they have grown in numbers (23,866 at the peak in 1969) and then started a long-term consolidation trend resulting in about 4,500 charters today. Many credit unions have evolved and grown through mergers and organic growth into sophisticated financial institutions with substantial assets, capital and earnings power.
Increasingly, credit unions have demonstrated their ability to acquire and invest in banks, ancillary financial services such as insurance agencies and registered investment advisors (RIAs), and financial technology companies. Ultimately, these acquisitions align with the credit union philosophy of providing comprehensive, member-focused financial solutions.
Many credit unions are already in the insurance business and manage investments for their clients. Utilizing an acquisition strategy can help build scale and diversify product lines alongside an organic growth strategy. Much like the credit union industry, insurance agencies and RIAs are vast in numbers, highly fragmented and poised for continued and accelerated consolidation.
The Opportunity
Insurance Agencies
There are approximately 40,000 independent insurance agencies in the US and over the last 5 years, there have been over 750 deals completed annually. Many agencies are family/founder-owned (average age of owners is 54) and are increasingly interested in a financial partner that can provide liquidity for owners and a differentiated distribution platform. Credit unions are a great fit to meet those trends. Smaller independent IS operate with a business model and customer approach much like credit unions – namely serving small business and families in a defined community.
Registered Investment Advisors
There are approximately 15,000 RIAs in the US and over the last 5 years, there have been over 200 deals completed annually. Like insurance, many RIAs are founder- owned and desire a partner that will provide liquidity and differentiated distribution capabilities. It may seem like credit unions would be an unlikely provider of wealth management and investment services or that an RIA would want to be acquired by a credit union. However, in many discussions with RIA owners, they are very interested in the prospect of having the platform of a credit union branches-and-services model. As an aside, a business acquaintance of mine recently began a banking relationship with a large credit union – about a $10MM loan for an apartment building. I asked him if he would give the credit union any of his investment business. His response was “well, they haven’t asked but they just lent me $10MM to buy this apartment, so I think I would give them some assets to manage”.
Strategic Rational
Acquiring an insurance agency or RIA presents a strategic opportunity for credit unions to enhance their service offerings and benefit from the following:
Diversification of Services
Acquiring an insurance agency or RIA allows credit unions to diversify their service offerings. This diversification not only meets a broader range of member needs but also creates multiple revenue streams, reducing reliance on interest income from loans.
Enhanced Member Relationships
Credit unions are known for their member-centric approach. By offering insurance and investment services, they can deepen relationships with members. This holistic approach can lead to increased member satisfaction and retention.
Immediate Impact to Scale & Increased Revenue Opportunities
Insurance and investment advisory services can be significant revenue generators. Insurance products, such as life, health, and property insurance, offer commissions and fees. Similarly, investment advisory services generate fees based on assets under management (AUM).
Cross-Selling Opportunities
With an expanded portfolio of services, credit unions can leverage cross-selling opportunities. For example, a member taking out a mortgage might also be interested in homeowners insurance or investment advice. Cross-selling not only increases revenue per member but also enhances the member experience by providing tailored financial solutions.
Expertise and Talent Acquisition
Acquiring an established insurance agency or RIA brings experienced professionals into the credit union. These experts can provide valuable insights and enhance the overall quality of service.
Long-Term Growth and Sustainability
Strategic acquisitions can position credit unions for long-term growth and sustainability. As member needs evolve, having a diverse range of services ensures that credit unions remain relevant and adaptable. This forward-thinking approach can attract younger members who seek comprehensive financial solutions, ensuring the credit union’s growth for generations to come.
Onward
While there has been a fair amount of debate about the “fairness” of tax-exempt credit unions buying for profit banks and it is likely that this debate would extend to other financial services, I would note that the IRS contemplated and addressed tax-exempt entities (think credit unions, hospitals, utilities) buying for profit entities through IRC 337. This provision established a tax on the difference between purchase price and net book value, with the premise that the tax paying entity is going out of existence and no longer will pay taxes.
Alternatively, if an acquisition is structured as an Asset Purchase & Liability Assumption, then there is a tax paid on the gain on sale of the assets calculated generally in the same manner of price paid for the assets over their book value. So, for the pundits that put forth the notion that credit unions should pay an exit tax or some other sort of tax in connection with a bank deal or any other acquisition, that provision already exists.
Furthermore, the credit union driven acquisitions (bank and non-bank) are all cash transactions which are subject to capital gains taxes to the shareholders whereas bank driven transactions are mostly structured with stock in a tax-free transaction until the stock is sold by the target shareholder.
IRC 337 tax or gain on sale of assets tax plus capital gains taxes – that’s two fairly significant tax events generated by a credit union acquisition of a for profit entity.
No matter your view on the tax situation, the fact remains that credit unions are here to stay as a valuable party in the financial services ecosystem that will buy banks and other financial services providers such as insurance agencies and RIAs.
The M&A Advisory group at Skyway Capital Markets has expertise that includes identifying potential transaction partners, developing creative deal structures, providing in-depth financial analysis and negotiating complex transaction terms.
