Telesis CCU – To Merge or Manage?

April 4, 2012 – By David Bartoo – Chatsworth, CA

All years of struggles, the NCUA made a move to manage Telesis Community Credit Union.  Preferably, the credit union would have been rolled into a much larger entity without any damage to the insurance fund.  That is the norm, but this is not a normal credit union.  With over $300 million in assets, there are very few credit unions that have the ability to merge out a borderline healthy credit union, let alone one with capital near 5% and delinquency over 12%.

What sets a TCCU apart from other credit unions of similar size that NCUA has merged out, is their location, loans and field of membership.  With over 300 credit unions already in the Los Angeles Metro area, TCCU, at a par value, brings few intangibles in terms of expanded FOM and market share with tremendous financial risk.  TCCU has not showed a profit since the 1st quarter of 2008, and the delinquency rate has exceeded the capital ratio for over a year.  This was a credit union that needs to be merged out at a discount or managed very aggressively.

In having Premier America now manage TCCU, the NCUA is taking the route of aggressive management.  The executive staff at Premier America will have the opportunity to clean up the delinquency and reduce expenses. While member business loans have been fingered as the primary driver of the failure of TCCU, the entire region is under stress.  Even Premier America, headquarters in Chatsworth as well, has seen its delinquency rise above 4% in 2011.  TCCU runs at a very low member to FTE ratio of just over 200 so there is a lot of room to reduce the largest overall cost – salaries.  Net margins run high at TCCU at over 7% but their expense to assets ratio is nearly 3 times that of Premier America, their cost of funds is nearly 20% higher and their loan to share ratio is below 60%.  It is fortunate that the credit union community has a Premier America willing to step up and help manage the problem.  They have a lot of tough decisions that need to be made quickly to reduce future opportunity cost in managing TCCU instead of quickly merging it out.

The FDIC is much faster to sell off non-performing banks.  The latest bank failure, a $818 million B&T in Michigan was sold this week at a $150 million dollar discount.  This was a loss of $96 million to the insurance fund at the FDIC, but it could be much worse if held in conservatorship.  But consider the millions being poured into Texans Credit Union and if it follows the industry the loss to the insurance fund could be $100 million to $300 million dollars.  Merging Telesis Community at a 15-20% discount could be a good opportunity for the right credit union and immediately clear the NCUA books of this distressed credit union. In my opinion, this will be an interesting path to follow with it’s new local management and the difference in losses suffered in a discounted quick sell versus a long term management policy.