Three days after the NCUA took control of Eastern FinancialFlorida Credit Union, Space Coast Credit Union, appointed by theregulator to temporarily manage the Miramar, Fla.-based financialinstitution, has proposed a merger of the two credit unions.

On April 24, the Florida Office of Financial Regulations' Bureauof Credit Union Regulation appointed the NCUA as conservator andthe NCUA gave over the reins to senior management from Space Coast.The news of the intent to merge came on April 27, the same dayofficials from Melbourne, Fla.-based Space Coast traveled toEastern Financial.

Timothy Antonition, executive vice president of retailoperations at Space Coast, will act as the project team leader aswell as the integration team leader for the merger process,according to Space Coast.

Despite Space Coast's intent, it is premature to say that themerger will happen and as with all proposals, is subject to theNCUA's approval, said John McKechnie, NCUA director of public andcongressional affairs.

“The NCUA Board has not approved a merger of Eastern FinancialFlorida Credit Union with Space Coast or any other institution atthis time,” McKechnie said. “During any conservatorship, NCUA doesnot confirm or deny merger applications; merger, liquidation orreturn to member control are all options we consider. The leastcostly option for the NCUSIF will be determined, and a decisionwill be made.”

The completion date of the merger has not been finalized, saidSpace Coast, which will be the surviving credit union. Should themerger go through, the consolidated credit union will have morethan 350,000 members, have $3 billion in assets and have more than60 branches and 150 ATM locations. Space Coast spokeswoman MeredithGibson said no personnel decisions were made within its intentagreement regarding layoffs but “a thorough assessment ofoperations will present a logical solution to staffing.”

“[Eastern Financial's] core operations and product offerings arestrong. The current situation was caused by problematic lending andinvestment decisions,” Gibson said. “A merger, if finalized, canprovide an enhanced service offering and greater strength for themembers of both credit unions.”

For the past year, Eastern Financial has struggled to recoverfrom a series of bad real estate loans. A net income loss of $113million buckled the 70-year old financial institution. According toNCUA call report data, the credit union's foreclosed real estateloans fluctuated from $205,000 in December 2007, more thanquadrupled to $893,935 in March 2008 and then decreased to nearly$754,000 in June that same year.

By September, however, foreclosed real estate had increased to$1 million and rapidly escalated to $12.6 million at the end ofDecember 2008. The credit union also charged off nearly $68 millionin loans at the end of last year, up from $23 million in December2007. Eastern Financial also took a $30 million loan hit after thedefault on a condominium project.

On March 19, the Florida Office of Financial Regulation issued acease and desist order against Eastern Financial for a series of“unsound and unsafe” practices. After reviewing findings from anOct. 6, 2008 report of examination, the OFR concluded that thecredit union was engaging in 15 unsound and unsafe practices,including not possessing adequate loan underwriting standards or aloan review program that evaluates risks and excessiveconcentration in member business loans (CU Times, April 15,2009).

The credit union was approached by the NCUA in January about apossible alliance with Eastern Financial, Gibson said. A CEO of anout-of-state credit union confirmed with Credit Union Times that itwas also approached by the regulator. The NCUA has “asked everylarge credit union in the Southeast” about a merger, he said.

“It's a normal procedure,” the CEO said of the NCUA seeking outpotential credit union merger candidates. “As a courtesy, NCUA willlook for partner credit unions in the area.”

“There's really nothing I can share,” said Linda Charity,director of the division of financial institutions at the FloridaOFR, which issued a cease and desist order in mid-March againstEastern Financial.

Eastern Financial would not comment either, sticking by an April7 statement that said OFR is “working closely [with the CU] on aroadmap to address the issues facing us.”

Both credit unions grew up together in Florida. EasternFinancial was originally chartered in 1937 to serve EasternAirlines. Space Coast formed in 1951 as Patrick Air Force BaseCredit Union. It has since grown to become one of Florida's largestcredit unions.

Historically, Space Coast has not sought to expand throughmergers, said Doug Samuels, president/CEO.

“Although the credit union has merged with a few smaller creditunions in its 57-year history, growth has been achieved throughcontinuous improvement and expansion of the services offered tomembers,” Samuels said. “What was of interest were our operatingefficiencies, our strong member base, and our branch and memberservice offerings.”