While it’s been a little over a year since Telesis Community Credit Union went under conservatorship, credit unions may find there are still more lessons to learn from the cooperative’s collapse.
Larry Middleman, president/CEO of CU Business Group LLC, a Portland-based business services and lending CUSO, recently shared some of those lessons during a webinar on business deposit trends.
“I’m not trying to pick on Telesis. These are just gems of wisdom to learn from,” Middleman told the attendees.
The NCUA’s Office of Inspector General released a report on March 21 that outlined a number of reasons why the $318 million Telesis in Chatsworth, Calif., experienced massive financial woes that ultimately led to its death.
Among those cited were investing too heavily into member business loans, failing to properly calculate loan-loss allowances, depending too much upon Business Partners LLC, its business lending CUSO for revenue, and spending too much on operating expenses.
One critical takeaway from Telesis is credit unions shouldn’t reach too far, Middleman advised.
“Don’t try to reach for volume. The other place is tertiary markets. Those are the small towns away from the metro markets,” he explained. “They will be hit the hardest in an economic downturn.”
For instance, the area that was affected during the recession the most in Phoenix was “everything around the edges,” Middleman said.
A second lesson is understanding that high yield is there for a reason, he offered.
“Why would a borrower accept a five-and-a half rate in this environment? Because they have to,” Middleman said. “When I look at a deal coming into a credit union, and it’s a hard money loan at 8% to 9%–well, how long has that property been around, what are the odds of success?”
A third take away from the failure of Telesis is really examining actual versus projection, Middleman suggested.
Someone might say “‘I’m buying this distressed apartment building. Rents are down, vacancies are high. Here’s my projection, so I want to get a loan,’” Middleman shared in a hypothetical situation. “Look, I can create projections in an Excel spreadsheet in 15 minutes. Always treat projections with healthy skepticism.”
The fourth lesson is exercising due diligence in participation loans, Middleman said.
“Look closely at the appraisals. Try to poke holes in it,” he noted.
Finally, credit unions might not want to get caught up in the hype.
“I’m seeing some desperation–‘We have to increase our loan totals or else,’” Middleman said. “I don’t know what ‘else’ is.”
CU Business Group, which currently serves 420 credit unions in 44 states and has processed more than $3.5 billion loans since it launched 10 years ago, has watched from afar the demise of credit unions such as Telesis, the defunct Eastern Financial Florida Credit Union and the commercial lending problems at $1.4 billion Texans Credit Union in Richardson, Texas.
Middleman ticked off some of the reasons cited by the NCUA’s OIG on why Telesis went under: investing too heavily in member business loans and depending too much upon its CUSO for revenue.
“It was out of control,” he said. “The lesson learned over the past five years is, don’t reach too far.”
The California Department of Financial Institutions placed Telesis in conservatorship on March 23, 2012 and the NCUA was named the liquidating agent. Telesis was liquidated on June 1, 2012, and assumed by the $1.3 billion Premier America Credit Union in Chatsworth, Calif.
While troubled loans were one of the culprits behind the demise of Telesis, Middleman said business deposits still aren’t getting the due they deserve. “We need to do a better job of capturing the relationship,” Middleman offered. “If you have the operating account of that business, you have a daily snapshot of that business.”
Businesses with 30 to 50 employees that have balances in the six figures and process a lot of transactions are ideal to court. Charging a nickel or dime per transaction may not seem like much, but it adds up over time, he explained.