Credit Unions Hunting for Nonbank M&A to Diversify Revenue

Source: S&P Capital IQ

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Credit unions are increasingly looking to buy nonbanks such as insurance brokers and wealth management firms in an effort to diversify their income.

The interest in nonbanks comes at a time when credit unions, much like banks, are facing a poor revenue environment due to tepid loan growth and low interest rates. Several deal advisers said in interviews that there are active discussions between credit unions and nonbanks that do not offer depository services.

"It's becoming more common as [credit unions] grow," said Michael Bell, partner and co-leader of the financial institutions practice group at Honigman LLP.

Over the past month, three of Bell's credit union clients have expressed interest in insurance or wealth management M&A. Credit unions are interested in acquiring individual insurance or trust services businesses, or acquiring banks with those existing business lines, Bell said. On Aug. 12, Royal CU agreed to acquire Lake Area Bank, an institution that reported $30.6 million in noninterest income over the last 12 months ended in the second quarter, compared to $17.3 million in total interest income.

Credit unions' "other noninterest income" — a data field that includes miscellaneous noninterest income excluding items such as investment gains and overdraft fees — has almost tripled since 2012. It is still relatively rare for a credit union to wholly own a fee-generating line of business. But with a weak earnings landscape, a growing number of credit unions are on the hunt for acquisitions that can boost income growth.

"Even the largest credit unions are saying, 'This is getting to be too much.' So they're looking at all kinds of things," Peter Duffy, a managing director at Piper Sandler, said in an interview. Duffy said credit unions are looking at everything from title insurance to trust services, motivated by a need to increase and diversify their revenue streams.