The management and board of Telesis Community Credit Union, aswell as the NCUA and California Department of FinancialInstitutions, are responsible for the credit union's failure,according to a Material Loss Review released this week by theNCUA's Office of Inspector General.

The OIG concluded that the $318 million credit union's leadersdeserve most of the blame for investing too heavily into memberbusiness loans, failing to properly calculate loan loss allowances,depending too much upon its business lending CUSO for revenue, andspending too much on operating expenses.

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4 Lessons From Telesis Failure

At one point in 2007, the report said, Telesis's commercial realestate loan portfolio represented 44% of its total assets. Telesiswas able to exceed the 12.5% member business loan cap thanks to a1998 waiver granted by the NCUA.

The NCUA liquidated Telesis on June 1, 2012, after the stateseized the failed Chatsworth, Calif., credit union on March 24,2012. The federal agency soon after put $177 million into apurchase and assumption deal with the $1.3 billion Premier AmericaCU, also in Chatsworth.

Telesis' dependence upon business lending grew when itestablished MBL CUSO Credit Union Business Partners in 2002.Business Partners quickly grew Telesis' business loan portfolio,specializing in five-year balloon terms that were susceptible toeconomic downturn, the report said.

Telesis' amplified its concentration risk with incorrectallowance for loan loss provisioning. The report said managementfailed to impair individual loans and used inappropriate lossprojections on loan pools. Examiners even reported Telesis“applying a zero percent historical loss rate over MBLs” whencurrent delinquencies at Telesis and industry-wide suggested muchhigher rates, the OIG said.

Telesis management was also cited for poor due diligence inpurchasing unprofitable CUSOs Auto Seekers and Autoland.

The OIG additionally questioned a conflict of interest in 2007when Telesis bought out AutoSeekers co-owner California Bear Credit Union ofLos Angeles. At the time of the deal, CalBear's president/CEO WaltAguis, who was also CEO of AutoSeekers, was married to Telesis CEOGrace Mayo.

Telesis management also concentrated too much power in just twopeople, Mayo and Executive Vice President Jean Faenza, the reportsaid.

“The CEO appears to have had a persuasive and aggressivemanagement style,” the report said. Mayo was also well known in theindustry and viewed as strategically successful. Those two factorsresulted in the board tending to “follow her recommendations withlittle discussion.”

Both federal and state regulators share in the blame for theTelesis failure, the OIG report said. The NCUA could have preventedor mitigated the $77 million loss to the share insurance fund hadit taken “a more timely and aggressive supervisory approach”regarding loan concentration risks. The NCUA also shifted Telesisbetween three different regional offices from when it wasdowngraded to a 4 CAMEL rating in September 2007 to when it wasseized in March 2012. The NCUA and California Department ofFinancial Institutions also failed to communicate throughout thedual examination process, the OIG report said.

The NCUA also told the OIG the California DFI “sent mixedmessages regarding whether they would agree to the NCUA examiners'recommendations and took considerable time to negotiate a finalresolution.”

The DFI conversely accused the NCUA Board of holding upconservatorship enforcement by requiring coordination with regularboard meetings, the report said.