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Plagued with a litany of loan losses and unstable operations, Eastern Financial Florida Credit Union has received a cease and desist order from the Florida Office of Financial Regulation for a series of “unsound and unsafe” practices.After reviewing findings from an Oct. 6, 2008 report of examination, the OFR concluded that the $1.6 billion credit union was engaging in 15 unsound and unsafe practices, including violations of laws related to its operation. A March 19 OFR cease and desist order targeted several areas-among them were not possessing adequate loan underwriting standards or a loan review program that evaluates risks and excessive concentration in member business loans.Other problem areas included not having adequate leadership, not having enough core deposits and operating without adequate policies to properly fund reserves for future losses of problem loans. The OFR has ordered Eastern Financial to submit a plan to restore its net worth to well-capitalized levels and to address its problem loans and assets.“They are working to comply with the provisions of the order,” said Robert Hayes, bureau chief at the Florida Office of Credit Union Regulation. “Management is making every effort to comply.”In an April 7 e-mailed statement to Credit Union Times, Eastern Financial wrote, “The State of Florida Office of Financial Regulation is working closely with Eastern Financial Florida Credit Union on a road map to address the issues facing us and so many other financial institutions. We are addressing the concerns quickly and fixing them so we can come out of this recession sooner than other financial institutions. We are very proud of the work that our staff has already done to mitigate the impact of the depressed Florida and United States economy.”According to the order, Eastern Financial has a series of deadlines to meet over the next 45 to 180 days. Effective immediately, the board and management has to show that the credit union has adequate liquid funds at all times to meet its obligations as they become due. Eastern Financial was also ordered to submit a written plan to improve earnings by April 3.Within 45 days of the March 19 order, Eastern Financial must submit a net worth restoration plan that would bring the credit union back to a “well-capitalized” rating. The plan must include a quarterly timetable of steps to make that happen, the projected amount of earnings to be transferred to the regular reserve each quarter, any new services to be provided and pro forma financial statements that include any off-balance sheet items.By April 30, the OFR ordered the credit union to obtain a final audit report instructing management to write off any collateralized debt obligations deemed permanently impaired. Effective immediately, the board must comply with interagency policy statement on the allowance for loan and lease losses dated in December 2006 and ensure that an adequate ALLL is maintained.Eastern Financial is also required to immediately prohibit extensions of credit or loan terms to members with adversely classified member business loans without the prior approval of a committee established by the board. The credit union must also submit a plan to reduce the concentration of credit in its member business loan portfolio. The OFR said within 180 days of the cease and desist order, net member business loans including unfunded commitments cannot be greater than the lesser of 1.75 times net worth or 12.25% of total assets.A review of business loan workouts conducted by CU Business Capital, a business services CUSO, has also been requested by the OFR. According to the order, the review should address “management depth and succession issues should CUBC staff no longer be able to support member business loan workout efforts or the review determines the CUBC workout efforts are insufficient to achieve the board’s desired goals.”Murray Halperin, senior vice president of institutional sales at CUBC, said “as it relates to any of CUBC clients, we must refrain from many any comments.”An Eastern Financial spokesman said he could not comment on any specific areas of the order and their respective deadlines. Linda Charity, director of Florida OFR’s division of financial institutions, said she could not share any information on CUBC’s business loan workouts or any of Eastern Financial’s progress.“That information is confidential. All that I can say is management is working to comply,” Charity told Credit Union Times.Other areas under scrutiny include a review of Eastern Financial’s Bank Secrecy Act and anti-money laundering program. The OFR has requested an independent test and further staff training.The credit union must also put together “a complete and effective management team” with the OFR having the sole discretion to evaluate potential candidates for the president, CEO, Bank Secrecy Act officer, chief lending officer, chief financial officer and chief operating officer for hire. Stephen McGill, Eastern Financial’s president/CEO since 2004, resigned in February 2008. He had been with the credit union in various roles since 1984. Since McGill’s resignation, executive vice presidents Gary Lanier and James Pavlonnis have served as co-interim CEOs, according to the Eastern Financial spokesman.Hayes did not want to speculate on what would happen if Eastern Financial did not comply with the order’s deadlines.“In dealing with speculative things, I would rather not comment. There are so many factors that could come into play. Let’s see how things unfold,” Hayes said.Like some credit unions, in 2008, Eastern Financial experienced higher than usual losses during the nation’s economic recession. According to NCUA data, it lost $40.2 million last year. As of Dec. 31, 2008, the credit union reported $67.8 million in total loans charged off, a substantial 53% increase from the $33.1 million reported in September 2008. Assets dropped from $1.81 billion to $1.63 billion during the same time period while total foreclosed and repossessed assets jumped from $6 million to $15.4 million. Eastern Financial also took a $30 million loan hit after the default on a condominium project.The NCUA has said Eastern Financial is one of several large, financially troubled credit unions undergoing treatment to get it back on track. Meanwhile, the first of several deadlines have come and gone for the credit union to meet. The credit union has been ordered to provide daily liquidity reports to the OFR and submit a written marketing plan that shows how it plans to increase low-cost, core deposits and reduce the amount of outstanding borrowings.The spokesman with Eastern Financial said he could not provide an update on where Eastern Financial is in meeting the order’s obligations to OFR. Regarding the submission of final appraisal reports requested by the regulator on properties in West Palm Beach and Fort Pierce, Fla., Hayes confirmed that some proposals have been received. He did not respond to requests for further updates in other areas.“They deserve an opportunity to comply with the order,” Hayes said. “Every effort is being made. I don’t want to put this into a public forum.”The Florida Credit Union League said it is supporting Eastern Financial in its efforts to come back into compliance.“I think they can bounce back. Eastern is working hard to come through the economic recession,” said Andy Price, general counsel at the league.Price said Florida’s OFR could have imposed harsher penalties but the regulator probably felt the credit union, which is still a member of the league, had the wherewithal to clean up its act.“The state could have gone a lot further than they did. I don’t know if they could have put them in receivership. You would have to ask them,” Price said. “They have been put under heightened supervision. I think the state is giving them a chance to turn things around.”–[email protected]

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