Merger of Airline CUs Unlikely, CUs May Use 'Poison Pills' to Thwart Takeovers

HAWTHORNE, Calif. — As more credit unions come forward confirming that Wings Financial Federal Credit Union sought them out as potential merger partners, the likelihood that a mega consolidated credit union to serve the entire air transportation industry is not likely.

In 2006, the $300 million FAA First Federal Credit Union had been approached by $1.6 billion Wings Financial with a “partnership proposal,” said Eileen Rivera, president/CEO of FAA First. Rivera said it was her understanding that Wings Financial was looking to have several credit unions serving the air transportation industry merge into one, multi-billion dollar financial institution. FAA First turned down the proposal.

Last week, $50 million Alaska Airlines/Horizon Air Employees Federal Credit Union also came forward when it learned that a Wings Financial employee had registered a domain Web name, AlaskaHorizonWings.com. Wings Financial confirmed the same employee had registered FAAFirstWings.com.

It was the consensus of the AAHAEFCU's board of directors to turn down a merger proposal from Wings Financial, said Dulce Frial, president/CEO. Frial confirmed that Wings Financial initially approached the financial institution in May 2006 and again in December 2006.

“It was the consensus of the board that the credit union should remain separate,” Frial said. “[The board] looked at key ratios. There is really no need for a merger.”

Frial said the CU had no knowledge of the domain name.

“This was done without our prior knowledge or consent. We already have a name and it doesn't include Wings,” Frial said. “And, we have a URL for the credit union.”

Frial, who took the helm at AAHAEFCU Jan. 1, said should Wings Financial approach the CU again, it is likely the board will reject a merger proposal.

“Primarily, at the credit union, we try to work well with our members and give them what they're asking for,” Frial said. “I've worked with credit union for 20 years and I have never heard of anything like [the Wings/Continental matter]. We strive not to be like banks and this hurts the industry.”

A Wings Financial spokesman said “we'll continue to decline to comment on such matters” when asked about AAHAEFCU. Meanwhile, Rivera said Wings Financial President/CEO Paul Parish assured her that FAA First was no longer being considered as a merger candidate.

Given the strong brands and solid performance records of several credit unions serving the airline industry, the odds of a mega merger are “very unlikely” according to one industry expert.

“There are three large credit unions–$4.4 billion Alliant Credit Union, $4.1 billion American Airlines CU and $2 billion Delta Community, with solid performance trends. All three have stable capital positions and all had positive growth in loans, membership and capital in 2006,” said David

Bartoo, president of Merger Solutions Group, a firm that assists CUs with mergers.

Indeed, according to the latest NCUA call report data, the three CUs have performed well in several categories over the past few years. Bartoo said FAA First also had a strong 2006.

“The majority of [FAA First's] key sustainability trends are positive and exceed the average performance levels of their transportation group peers,” Bartoo noted, citing NCUA data. “Given the growth in membership and loans in 2006, FAA First is clearly providing their members with beneficial rates, products and services.”

American Airlines CU President/CEO John Tippets previously said it was approached in 2005 by Wings Financial, but there was no discussion of a merger or a partnership proposal. Tippets said it is unlikely that the CU would consider a merger because of its strong ties to Texas-based carrier American Airlines.

Beyond the unlikelihood of a mega airline CU, specifically those that have trade, industry and professional charters to serve the air transportation industry, are those credit unions that are wondering what options are available to buffer unsolicited takeovers. Indeed, for one attorney, the Wings Financial/Continental matter has sparked an increase in credit unions asking about “poison pills” to avoid hostile takeovers.

A couple dozen CUs have called seeking counsel on strategies they can employ to remain independent, said Michael Lozoff, chair of the Financial Institutions Section, Credit Union Law Group at Adorno & Yoss, LLP. The law firm represents nearly 70 CUs nationwide including several billion dollar ones. Lozoff said he predicts some CUs may follow the lead of $1.5 billion Tower FCU, which earlier this year amended its bylaws prohibiting any consideration of a bank conversion unless specifically requested by at least 500 members at a special meeting called for that purpose.

“What Tower did was effective,” Lozoff said. “I have nothing against credit unions seeking growth strategies and negotiating mergers. I think Wings is doing things I have never seen and the underlying [feeling] is this somewhat cynical understanding that credit union members are not as loyal as they used to be.”

The fervor prompted by the unprecedented merger tactics by Wings Financial to Continental led to NCUA at its April 12 board meeting to discuss its Part 708b Rule, which governs credit union mergers and “was designed to ensure the full consent and cooperation of both institutions when such a transaction would occur.” (See story on page 1-34).

“We are entering a new and interesting phase for our industry,” Lozoff said. “I'm very interested in seeing how the regulator will respond so that [CUs] can facilitate growth strategies and at the same time adhere to proper procedures.” –msamaad@cutimes.com