MIRAMAR, Fla. — In the biggest failure of a natural person credit union, Eastern Financial Florida CU, the one-time high-flying airlines credit union, was taken over by state regulators and NCUA after a grounding by the state's turbulent real estate market.
The takeover provided an opportunity for Space Coast CU, located 100 miles north, to swoop in and offer to acquire the $1.6-billion credit union, located in suburban Miami. An application is pending with NCUA, which was asked by the Florida Office of Financial Regulations to run the state chartered Eastern Financial under conservatorship.
Eastern Financial, which had as much as $2.4 billion in assets just 18 months ago, has been struggling with a potent brew of the state's real estate bust and poor investments, including loans to two failed multi-million dollar condominium projects and a $70-million collateralized debt obligation, a risky mortgage-backed security.
The situation erased all of the credit union's net worth and forced the state regulator to issue the 72-year-old credit union with a strict supervisory order in March.
But officials with Space Coast were confident that both the structure of Eastern Financial and its southern Florida franchise are both sound. "This merger will provide members of both credit unions with an expanded service area=2 0that provides branches and ATMs along the I-95 corridor and beyond," said Doug Samuels, president Space Coast. "We are also excited about being able to apply the operating efficiencies SCCU has built to the new, larger credit union, and ensure that the member-owners receive a good return on their investment in the cooperative."
The deal will put severe strains on Space Coast because Eastern Financial ended the first quarter with negative capital of $3.5 million, unless NCUA agrees to put some money into the merger. While Space Coast ended the first quarter with more than 11.2% capital, any merger without NCUA assistance would deplete all of its excess capital.
Net Worth Ratio Must Improve
The merged institution must have a net worth-to-asset ratio well above the NCUA's required 7% for a well-capitalized institution. Together, the two credit unions will have about $200 million in net worth of less than 7% ratio based on their combined $3.29 billion in assets.
Eastern Financial reported a whopping $133 million loss for 2008 and a $4.5 million loss for the first quarter of 2009.
Space Coast itself has also become affected by the state's recession, one of the deepest in the nation. It eked out $361,092 in net income on its $1.7 billion in assets last year, but reported a $11.7 million loss for the first quarter, comprised of a $3.2 million operating loss and an $8.5 million charge for its share of the corporate credit union bailout, and a 3.3% delinquency ratio.
The plan to meld two large credit unions with losses is being tried across the state with Suncoast Schools FCU and GTE FCU also working on a merger. Suncoast Schools had a $76.7 million loss for 2008 and a $53.6 million loss for the first quarter; while GTE had a $27.5 million loss for 2008 and a $21 million first quarter loss. Tom Dorety, president of Suncoast Schools, said their merger is on track and the respective staffs are currently engaged in due diligence.
But last week $1.4 billion MidFlorida FCU called off its planned merger with $220 million Sarasota Coastal CU which had a $3.1 million loss in the first quarter, and a $2.7 million loss for 2008.
A Team Of 10 Performed Due Diligence
A team of 10 senior managers from Space Coast were at the Eastern Financial CU last week performing due diligence.
Meredith Gibson, a spokesperson for Space Coast, said despite several problems, they believe Eastern Financial has a viable structure and a valuable franchise. "They have tremendous strengths," she said.
Space Coast was chartered in 1951 to serve employees working on the space program at what was then known as Cape Canaveral and now serves more than 1,000 select groups.
Eastern Financial was chartered in 1937 to serve employees of Eastern Airlines and made itself over after the 1991 bankruptcy and liquidation of Eastern and now serves more than 1,200 select groups.
The state regulators issued Eastern Financial a cease and desist order in March that covered a variety of management shortcomings, including management of member business loans, recording of delinquencies and charge-offs and the lack of a permanent CEO, since the February 2008 departure of CEO Stephen McGill.
Among other things, Eastern Financial was directed to charge off any permanent impairment to more than $70 million of collateralized debt obligations it holds, as well as to obtain final appraisals on an undeveloped condominium project that is in foreclosure. The regulator also cited Eastern Financial for not having enough core deposits to ensure it can meet funding obligations; not possessing adequate loan underwriting standards; carrying an excessive level of concentrations of member business loans; and not having adequate oversight to prevent violations of the Bank Secrecy Act.
