Telesis Failure Blamed on Management, Board, Regulators
The NCUA’s Inspector General blamed Telesis Community Credit Union’s former management and board as well the NCUA and California Department of Financial Institutions for the Chatsworth, Calif.-based institution’s failure in a material loss review released March 20.
The Inspector General’s recommendations in the report reveal credit unions can expect a proposed rule from the NCUA this year that will require a higher level of risk based net worth for credit unions with a higher level of concentration or other risks in their MBL portfolios.
The IG further pressed the need for the NCUA to expand its examination authority to include CUSOs.
The OIG concluded that the $318 million credit union’s leaders deserved most of the blame for investing too heavily into member business loans, failing to properly calculate loan-loss allowances, depending too much upon its business lending CUSO for revenue and spending too much on operating expenses.
At one point in 2007, the report said, Telesis’s commercial real estate loan portfolio represented 44% of its total assets. Telesis was able to exceed the 12.5% member business loan cap thanks to a 1998 wavier granted by the NCUA to the then-federally chartered credit union “because member business lending was [its] core business,” the report said. The following year, the Telesis converted to a state charter, retaining its MBL cap exception.
Telesis’ dependence upon business lending, particularly commercial real estate, grew when it established an MBL CUSO in 2002, Credit Union Business Partners. Business Partners quickly grew Telesis’ business loan portfolio, specializing in five-year balloon terms that were susceptible to economic downturn, the report said. The credit union was also concentrated geographically, with 52% of its business loans made in California, with additional investment in sands states that were hard hit in the economic downturn.
Telesis’ amplified its MBL concentration risk with incorrect allowance for loan loss provisioning. The report said management failed to impair individual loans and used inappropriate loss projections on loan pools. Examiners even reported Telesis “applying a zero percent historical loss rate over MBLs” when current delinquencies at Telesis and industry-wide suggested much higher rates, the OIG said.
Telesis management was also cited for poor due diligence in purchasing unprofitable CUSOs Auto Seekers and Autoland. The OIG additionally questioned a conflict of interest in 2007 when Telesis bought out AutoSeekers co-owner California Bear Credit Union of Los Angeles. At the time of the deal, CalBear’s president/CEO Walt Aguis, who was also CEO of AutoSeekers, was married to Telesis CEO Grace Mayo.
Telesis management also concentrated too much power in just two people, Mayo and Executive Vice President Jean Faenza. Faenza was CEO of Autoland and Business Partners, with Mayo serving as chairperson of the board. Twice, Mayo requested and approved a line of credit from Telesis to Autoland, completing the transaction herself as Autoland chairperson and Telesis CEO.
“The CEO appears to have had a persuasive and aggressive management style,” the report said. Mayo was also well known in the industry and viewed as strategically successful. Those two factors resulted in the board tending to “follow her recommendations with little discussion.”
Both federal and state regulators share in the blame for the Telesis failure, the OIG report said. The NCUA could have prevented or mitigated the $77 million loss to the share insurance fund had it taken “a more timely and aggressive supervisory approach” regarding loan concentration risks. The NCUA also shifted Telesis between three different regional offices from the time the credit union’s CAMEL rating was downgraded to a 4 in September 2007 to when it was seized in March 2012.
The NCUA and California Department of Financial Institutions also failed to communicate throughout the dual examination process, with the NCUA failing to specify the extent and type of work performed by each agency, failing to record discussions between the two regulators and failing to assign follow-up or enforcement responsibilities.
The NCUA also told the OIG the California DFI “sent mixed messages regarding whether they would agree to the NCUA examiners’ recommendations and took considerable time to negotiate a final resolution. The DFI conversely accused the NCUA Board of holding up conservatorship enforcement by requiring coordination with regular board meetings.
The IG scolded the NCUA for having made the same recommendation in a previous material loss review of Eastern New York FCU. The NCUA responded, saying it agrees exams should ensure regulatory compliance and adequately identify the risk a CUSO poses. NCUA said it would “evaluate the feasibility of expanding examination procedures over CUSOs and whether to include a review of the credit union and CUSO as standalone entities with regards to profitability.”