ALEXANDRIA, Va.-An increasing reliance on fees and other revenues from its member business loan portfolio sent Telesis Community CU spiraling toward insolvency as a growing number of the one-time $615-million credit union's MBLs went sour, according to a report issued last week by NCUA's Office of Inspector General.
The Material Loss Review for Telesis, which NCUA took over a year ago and eventually assigned to Premier America CU, estimates the failure will cost the National CU Share Insurance Fund $77 million, making it one of the biggest failures of the last few years.
Management built its portfolio primarily around a five-year balloon payment structure that grew quickly and became geographically dispersed, the report found. As the state of the credit union eroded, management sold the best performing loans in an effort to offset shrinking net worth, ultimately leaving an unhealthy loan portfolio.
The IG also noted that conflicts of interest existed in the organization of the Business Partners CUSO where the Telesis CEO Grace Mayo served as chairman of the board and the Telesis EVP served as CEO.
Further, examiners noted that Business Partners shareholders held shares equal to $12 million at the credit union, well over the insured limit at a time when Telesis was known to be under-capitalized, indicating that decisions were undertaken that did not satisfy the requirement of an arm's length transaction, the IG said.
Misreading The Market
Telesis failed to properly impair individual loans and use loss rates on the loan pools that were reflective of current conditions, which resulted in NCUA and an external auditor requiring adjustments between 2006 and 2008.
The IG's report also suggests that strategic misreads by the board and management led to increased commercial real estate lending and a dependence on fee and service income from its majority-held CUSO without consideration of the effects of a significant economic downturn on either source. In addition, purchases of the unprofitable AutoSeekers and Autoland CUSOs without appropriate due-diligence led to increased operating expense and impairment loss, the report stated.
"We concluded that management underestimated the potential effects of downturns in the real estate market and overall economy on the loan portfolio and its ability to generate revenue from the Business Partners CUSO," wrote the inspector general. "This was seen in both the size and character of the loan portfolio, and the methodology used to reserve for related losses."
The IG also found from 2006 to 2011, TCU's loans averaged 118% of shares, an amount significantly higher than the industry average of 77% for the same period. In order to originate loans, Telesis borrowed from the FHLB and WesCorp, resulting in significant borrowing costs.
Additionally, in September 2011 examiners noted the necessity to pledge loans as collateral created pressure to inflate their grading. The fact that Telesis failed to adopt a policy to appropriately grade substandard loans in response to the Document of Resolution issued in December 2009 corroborates this, the report states.
NCUA Also Found At Fault
The IG also criticized NCUA's examiners. "We determined NCUA could have prevented or mitigated the loss to the NCUSIF had they taken a more timely and aggressive supervisory approach regarding (Telesis's) concentration risks in its loan portfolio," the report states.
"We also determined NCUA could have coordinated more effectively with the California DFI, and not created a lack of continuity in the supervision of TCCU from an ever-shifting regional authority, which may have contributed to the lack of an aggressive approach," the IG said in its report.
On Oct. 2, 1998, just after Congress passed the CU Membership Access Act, which set limits for all credit unions at 12.25% for MBLs, NCUA granted Telesis an exception, because business lending was the credit union's core business. In 1999, the credit union converted to a state charter and retained the MBL exemption.
Losses From CUSOs
In 2002, Telesis established Credit Union Business Partners, which was organized to participate and service MBLs originated by owner credit unions, including Telesis. By 2010, 17 CUs held equity in Business Partners, although Telesis remained the majority shareholder.
In 2007, TCCU purchased two additional CUSOs, AutoSeekers and Autoland. The CEO of AutoSeekers at the time was a related party to Grace Mayo. Telesis purchased AutoSeekers in April 2007 and disbanded it in December of the same year. Autoland showed consistent losses from the time of acquisition through conservatorship.
