CHATSWORTH, Calif.-Although the easy answer seems to be $318-million Telesis Community Credit Union was taken into conservatorship by the California Department of Financial Institutions due to its extensive member business lending activities, other circumstances also were involved.
The banking industry was quick to point to Telesis as a reason credit unions should not be given expanded MBL authority (see related story, page 10).
Steve Williams, principal, Scottsdale, Ariz.-based Cornerstone Advisors noted that although the "story of the failure clearly starts" with member business lending, there were "other whammies" for Telesis, including asset quality issues. Telesis' most recent call report showed a 12% delinquency ratio.
"It also had more than $400 million in participations that it was servicing for other credit unions," noted Williams. "When participations go bad other credit unions are not happy they bought the loans. Finally, Telesis had high operating expenses with its business model."
Mike Schenk, senior economist with CUNA, noted Telesis' problems were also due in part to a local economy and real estate market that had "tanked."
Five Consecutive Years of Losses
Telesis lost $4.6 million in 2011, including paying $669,502 to the Corporate Stabilization Fund. Its ALL was $20.7 million. Its net worth ratio as of Dec. 31 was 5.48% ("undercapitalized").
In 2010 Telesis lost $11.2 million, including $815,000 in assessments. Its ALL was $21.8 million and its net worth ratio was 5.51%. In 2009 the CU lost $10.9 million, including $448,874 paid to the NCUSIF. Its ALL was $11.2 million and its net worth ratio was 6.95% ("adequately capitalized"). In 2008 it lost $13.5 million, as its ALL was $11.5 million. Its net worth ratio was 7.71% ("well capitalized").
Total assets on Dec. 31 2007 were $600.9 million, but at year end 2008 that had declined to $573.5 million, followed by $478.7 million in 2009, $400.7 million in 2010 and $318 million at the end of 2011.
Telesis was placed into conservatorship by the state's DFI, with NCUA now acting as the conservator. Its former CEO, Grace Mayo, who recently received a $2 million retirement fund payout, has been replaced.
"No one problem alone led to the decision to conserve Telesis Community Credit Union," said NCUA Public Affairs Specialist John Zimmerman. "It had several problems we identified, including declining net worth, high loan delinquencies, high operating expenses, impairment of assets and increasing reserves to loan losses."
Zimmerman noted commercial real estate prices that had peaked in 2007 had declined 35% at the end of 2011.
Telesis had interests in several CUSOs. It founded Business Partners LLC in 1995, but more recently, Business Partners was owned by 17 CUs. It offers business lending services to financial institutions, including origination, underwriting, documentation, servicing, risk management and reporting. Recently it had more than $1.5 billion in business loans under asset management.
A telephone call to Business Partners was referred to NCUA. A call to Autoland, an auto buying service also based in Chatsworth that was owned by Telesis and other credit unions, was not returned.
NCUA's Zimmerman said "it is very much business as usual" between Telesis and the Business Partners and Autoland CUSOs.
'Proved To =Be Too Much'
Cornerstone's Williams observed that "Business Partners was known as having business lending as a strong niche. It is good to have a niche and build up expertise in an area, but it is up to the board to decide if there is concentration risk," he assessed.
Telesis had $243 million in loans listed in its December 2011 5300 Report, and $175 million in business loans, Williams noted.
"The upshot is that is quite a lot of loans," he said. "If the credit union was doing it well that is great, but if things don't go well that is a lot of concentration of the members' capital."
According to Williams there are three precautionary lessons from the troubles at Telesis: first, don't come late to the party; second, do slow and steady growth, and third, beware of concentration risk.
"A lot of credit unions should realize commercial lending is a turtle race," he said. "They need to put commercial lending in their overall risk appetite and avoid concentration risk. Apparently the board and management of Telesis were willing to take on a lot of concentration risk in the business area and it proved to be too much."