ALEXANDRIA, Va. An increasing reliance on fees and other revenues from its member business loan portfolio sent Telesis Community CU spiraling toward insolvency, accelerating as a growing number of the one-time $615-million credit union’s MBLs went sour, a new report issued this afternoon by NCUA’s Office of Inspector General says.
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, marking it one of the biggest failures of the last few years.
Among the findings: management at the Chatsworth, Calif., credit union maintained a heavy concentration in MBLs, particularly commercial real estate loans, based on its exception granted by NCUA to the congressionally mandated 12.25% (of assets) MBL cap.
Management built its portfolio primarily around a five-year balloon payment structure that grew quickly and became geographically dispersed. 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 Telesis CEO Grace Mayo served as chairman of the board, and the Telesis executive vice president 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 credit union failed to properly impair individual loans and use loss rates on the loan pools that were reflective of current conditions. These failures resulted in $8 million in NCUA- and external auditor-prompted adjustments between 2006 and 2008.
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.
“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 attorney 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, the credit union’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 Federal Home Loan Bank and WesCorp FCU, which resulted in significant borrowing costs.
Additionally, in the September 2011 examination, 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 during the December 2009 examination corroborates this.
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. 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 credit union was charted in 1965 as Teledyne Employees FCU, and grew to serve all of northeast Los Angeles, as well as employees of more then 500 businesses including the ancestors of the original Teledyne companies. On Oct. 2, 1998, just after Congress passed the CU Membership Access Act, which set limits for all credit unions at 12.25% for member business loans, NCUA granted the credit union an exception to the MBL limits 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.
In 2002, Telesis established the Credit Union Business Partners. The model behind Business Partners was to participate and service MBLs originated by owner credit unions, including Telesis. By 2010, seventeen credit unions 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 party related 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.
For the year ended Dec. 31, 2007, Telesis posted both its highest total revenue and expense since at least 2002. The result was a net loss of approximately $13.5 million. The credit union posted consistent net losses throughout the remainder of its operating life, with an average net loss of approximately $10.8 million per year.
The inspector general concluded that Telesis relied upon a single product business loans to generate most of its interest income, which was but one strategy among several management developed without sufficient consideration and judgment.
