Due Diligence RepoRt - Catalyst Corporatecatalystcorp.org/Contents/DueDiligence_Pdf/DDRQ314.pdf · Due Diligence RepoRt third Quarter 2014. Please note: hyperlinks in this\rdocument

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Due Diligence RepoRtthird Quarter 2014

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2 | 3rd Quarter • 2014 Due Diligence

Dear Valued Member:

Catalyst Corporate Federal Credit Union is providing this third Quarter 2014 Due Diligence Report to update credit

unions on its performance and to support their due diligence efforts. The idea for the Due Diligence Report came from

a member who requested that Catalyst Corporate publish all due diligence information in a single document. The

suggestion was adopted because it aligns so well with Catalyst Corporate’s mission to be a premier innovative corporate

credit union that provides exceptional member value in an efficient, safe and sound manner.

Catalyst Corporate’s operating fundamentals also focus on efficiency, safety and soundness. These fundamentals remain

constant from year to year, helping Catalyst Corporate stay true to its promise to support the success of member-owners.

They also guide the prioritization of the initiatives in the strategic plan. Among the operating fundamentals:

Catalyst Corporate…

• Continuously strives to maximize efficiency.

• Prioritizes strategies that create value for member credit unions.

• Leverages technology to achieve its objectives whenever possible.

• Continues to build financial strength in ways that surpass milestones and regulatory requirements.

• Protects its members’ assets by closely monitoring and managing risks of all kinds including credit, interest rate,

liquidity, operational, reputation and enterprise-wide risk.

• Is transparent with regard to its financial performance and operational practices affecting safety and soundness.

• Is guided in all decisions by its structure as a member-owned cooperative.

• Achieves and maintains a strong degree of engagement with its volunteer leadership, who are a primary link to the

membership at large.

The Catalyst Corporate Due Diligence Report includes financial statements with detailed commentary and information

about Catalyst Corporate’s risk profile, portfolio composition, CUSO investments, and compliance with NCUA Rules and

Regulations Part 704. Also included is information about operational practices designed to protect member credit unions.

Each edition of the report includes useful information about a current issue affecting credit union engagement with

Catalyst Corporate.

The Due Diligence Report is posted quarterly on the Catalyst Corporate website at www.catalystcorp.org/duediligence and

is available for download at any time. Please feel free to contact me or another Catalyst Corporate team member if you

need additional information.

Best regards,

Kathy Garner

President/CEO

[email protected]

letter from the president

www.catalystcorp.org/duediligence.aspx

3rd Quarter • 2014 Due Diligence | 3

current issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Quarterly Financial Report

• Results of Operations . . . . . . . . . . . . . . . . . . . . . . 6

• Consolidated Statement of Financial Condition . . 7

• Consolidated Statement of Income . . . . . . . . . . . 8

• Consolidated Statement of

Comprehensive Income . . . . . . . . . . . . . . . . . . . . 9

• Consolidated Statement of Members’ Equity . . . . 9

• Notes to Consolidated Financial Statements . . . . 10

Annual Report

• 2013 Financial Statement Audit Report . . . . . . . . 12

• 2013 Annual Report . . . . . . . . . . . . . . . . . . . . . . . 12

Risk Measures

• Credit Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

• Interest Rate Risk . . . . . . . . . . . . . . . . . . . . . . . . . . 14

• Liquidity Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

portfolio

• ALM Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

• Diversification Limits to Asset Size . . . . . . . . . . . . 16

• Sector Limits to Capital . . . . . . . . . . . . . . . . . . . . . 17

• Single Obligor Limits to Capital . . . . . . . . . . . . . . 17

Key performance Ratio graphics

• Operating Efficiency Ratio . . . . . . . . . . . . . . . . . . 18

• Retained Earnings Ratio . . . . . . . . . . . . . . . . . . . . 18

• Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

• Tier One Risk-Based Capital Ratio . . . . . . . . . . . . 18

• Total Risk-Based Capital Ratio . . . . . . . . . . . . . . . 18

cuSos and partners

• CUSOURCE, LLC

(dba Catalyst Strategic Solutions) . . . . . . . . . . . . 19

• Credit Union Business Group, LLC . . . . . . . . . . . 19

• CU Investment Solutions, LLC . . . . . . . . . . . . . . . 19

• Primary Financial, LLC . . . . . . . . . . . . . . . . . . . . . 20

• Alaska U.S.A. Trust Company . . . . . . . . . . . . . . . 20

operational compliance

• Business Continuity Summary . . . . . . . . . . . . . . . 21

• Business Continuity Activity Report . . . . . . . . . . . 23

• Fidelity Bond Statement . . . . . . . . . . . . . . . . . . . . 23

• Bank Secrecy Act/Office of

Foreign Assets Control Summary . . . . . . . . . . . . . 24

• Privacy and Security . . . . . . . . . . . . . . . . . . . . . . . 25

• Affidavit Regarding Part 717 . . . . . . . . . . . . . . 25

• Affidavit Regarding Part 716 and 748 . . . . . . 26

• SSAE16 Statement . . . . . . . . . . . . . . . . . . . . . . . . 27

table of contents


current issue

loan participations – A Recipe for Success

With the economy (and loan demand) warming up, loan participation is a hot topic, and plenty of credit unions are participating on both the buyer and seller side. A successful loan participation recipe requires two key ingredients: solid strategy and an understanding of mechanics.

ingredient 1: Strategy Credit unions benefit from using loan participation to achieve strategic goals.

Buyers generally engage in these transactions to augment loan demand, but credit unions also use participations to manage the balance sheet and key regulatory ratios. Buyers’ financial performance may be enhanced by deploying excess liquidity at better rates than typical investments and may benefit from portfolio diversification in areas such as geography, credit and loan type – reducing overall risk and achieving regulatory compliance.

Sellers can better meet member borrowing demand by selling to generate funding for new loans. Participations help sellers manage concentration and interest rate risks and improve financial performance. Sales proceeds may be used to pay down borrowings and, in some cases, sellers’ excess operational capacity can be leveraged to generate servicing fee income.

When considering loan participations, credit unions should begin by prioritizing strategic objectives to guide implementation of policy and plan.

ingredient 2: Mechanics Definitions and Roles: When preparing to launch a loan participation program, an accurate understanding of what a loan participation is (and is not), as well as buyer and seller roles, provides a good foundation.

loan participation: A co-ownership arrangement in which a fractional undivided interest in a loan or pool of loans is sold by one entity to another

The term “undivided interest” alludes to an arrangement where each buyer (participant) owns a fractional interest in a loan or pool of loans, without designated ownership of a specific segment of the loan. In a loan participation pool, each buyer has a pro rata share of every loan in the pool.

In a non-recourse transaction, buyers and seller participate in pro rata share of the performance of the loans and the associated credit risk. All participants are allocated their pro-rata share of principal, interest payments, charge offs and collection expenses. In a non-recourse transaction, the seller receives “sale treatment” under accounting guidelines and is able to remove the sold portion of the loans from its balance sheet.

In a full-recourse transaction, buyers do not share in the credit risk. Although referred to as a loan participation, this transaction is equivalent to a secured borrowing, since the seller does not remove assets from the balance sheet and retains a corresponding liability. Because the seller is “guaranteeing” performance of the loans in a full recourse transaction by protecting the buyer from losses, the participation should carry a lower rate than a non-recourse transaction. The “co-owner relationship” between buyers and seller is important to understand.

In any loan participation transaction, the selling credit union typically originates the loans, takes responsibility for servicing, and deals directly with the borrower. However, the seller may not modify the loan without consent of all parties. Typically, buyers and sellers are involved in certain issues that may arise, such as modification or legal matters. Buyers are not parties to the original loan documents with the borrower; the debtor/creditor relationship remains between the seller and the borrower.

Rules of the Game ncuA: In September 2013, a new NCUA loan partici-pation rule (701.22) took effect. This rule establishes requirements for loan participations in areas such as retained interest, policy parameters, concentration limits and necessary agreement terms. A complete overview of the rule may be viewed in the “Current Issue” page 4 of the Second Quarter 2013 edition of the Due


current issue

Diligence Report: http://www.catalystcorp.org/duediligence/ddrq213.pdf.

FASB: The Financial Accounting Standards Board (FASB) has issued Accounting Standards Codification (ASC) 860, formerly (FAS) 166 and 140, addressing the concept of participating interest:

• Participating interest is defined as a proportionate ownership interest in a financial asset.

• All cash flows must be divided proportionately among participants based on percentage of ownership.

• The rights of each participant have the same priority.

• No party has the right to pledge or exchange the entire financial asset unless all agree.

FASB also outlines the conditions for “sale treatment” when a financial asset is transferred:

• The transferred financial assets have been isolated from assets of the seller.

• Each buyer has the right to pledge or exchange the assets.

• The seller does not maintain effective control over the transferred financial assets.

• There is no provision for recourse.

ASC 860 recognizes “clean up” calls as an exception to this rule. If a loan participation sale does not meet the definition of a “participating interest,” as well as the conditions for “sale treatment,” the transaction must be accounted for as a secured borrowing, and the seller cannot remove the loan assets from the balance sheet.

The Deal Before proceeding, sellers and buyers must have a loan participation policy in place

Seller: For a seller, the first step is to determine what objectives are to be accomplished by the loan participation program. These objectives will inform the recourse decision, the selection criteria a credit union uses to determine which loans to sell, and how removal of certain assets will impact overall risk on the balance

sheet. After selecting loans, the credit union should establish terms of the loan participation transaction, including the ownership stake to be retained, whether there will be recourse, if there will be a clean up call, and whether to retain servicing or to establish a minimum purchase amount. Next is pricing. Considerations that influence price include charge-off history on the pool of loans, credit profile of borrowers, prepayment history, term and average life of loan(s). These variables will influence the price point. A seller should review the loans it plans to sell to ensure the loan participation package is well-documented and appropriately-priced. Once these steps are completed, it’s time to find a buyer – a process that can be pursued independently, or with a third party, such as Catalyst Corporate, acting as an agent.

Buyers: The potential buyer(s) should not only evaluate the loans, but also pursue a good understanding of the originating credit union by reviewing policies for lending/underwriting, scoring method, servicing and collection, charge-offs and recoveries, loan modifications and ALM, in addition to ascertaining the experience of lending and collections staff. In addition, the buyer should fully understand provisions of the loan agreement such as recourse, clean-up calls, and servicing responsibilities.

Due diligence should include consideration of whether assets are a good fit for the buyer. It will be necessary to demonstrate that loans have received the same scrutiny as loans originated internally by the buying credit union.

conclusion Loan participations offer an excellent opportunity for buyers and sellers to manage liquidity, mitigate risk and optimize financial performance. They also require understanding of the “key ingredients” and close adherence to a recipe that will protect the interests of and achieve compliance for all parties.

For more information about loan participation programs, contact Catalyst Corporate VP of Member Credit Jeffrey Hamilton at 800.442.5763, ext. 7870 or [email protected].



ReSultS oF opeRAtionS

Catalyst Corporate’s net income for the nine months ended September 30, 2014 totaled $8,148,126 compared to

budgeted net income of $5,936,782. The higher than budgeted net income included gains of $765,170 recognized

due to early prepayments of three member term loans. Year-to-date (YTD) operations resulted in an operating

efficiency ratio of 89.5 percent versus a budgeted 82.9 percent. Catalyst Corporate’s retained earnings ratio of

1.43 percent exceeds the regulatory requirement of 0.45 percent that took effect on October 31, 2013 and the

1.00 percent regulatory requirement that will take effect on October 31, 2016. A summary of the unaudited results

of Catalyst Corporate operations for the past four quarters is included in the following table.

oct-Dec JAn-MAR ApR-Jun Jul-Sep 2013 2014 2014 2014

Net interest income $3,239,848 $3,251,763 $3,306,674 $3,259,550Net fee income 7,234,242 6,664,971 7,349, 283 6,825,690 Operating expenses 8,429,798 7,659,718 7,875,180 7,740,077Other net gain — 273,699 491,471 — net income $2,044,292 $2,530,715 $3,272,248 $2,345,163 Key information Net operating expense $1,195,556 $994,747 $525,897 $914,387Operating efficiency ratio 85.8% 87.0% 93.3% 88.2%Return on assets 0.32% 0.42% 0.54% 0.39%Daily average net assets – 12 month rolling $2,531,936,372 $2,465,877,776 $2,424,491,780 $2,410,474,863Perpetual contributed capital $161,474,655 $161,987,097 $162,431,096 $162,451,670Undivided earnings $26,601,559 $28,859,784 $31,868,915 $33,951,202Leverage ratio 7.27% 7.59% 7.85% 7.98%Retained earnings ratio 1.07% 1.19% 1.33% 1.43%

Tier one risk-based capital ratio 25.24% 24.28% 23.61% 22.78%Total risk-based capital ratio 25.24% 24.28% 23.61% 22.78%



conSoliDAteD StAteMent oF FinAnciAl conDitionSeptember 30, 2014 unAuDiteDAssets Cash and cash equivalents $1,149,831,398Investments: Available-for-sale 742,626,533 Federal Home Loan Bank capital stock 924,900 Investments in credit union service organizations (CUSOs) 4,453,501Loans to members 333,139,498Accounts receivables and other assets 15,701,324Property and equipment, net 13,844,107Goodwill 2,767,548Total assets $2,263,288,809

liabilities Members’ share accounts $2,057,828,718 Members’ share certificates 3,911,342Accrued expense and other liabilities 6,616,767Total liabilities 2,068,356,827

Members’ equity Perpetual contributed capital (PCC) 162,451,670Undivided earnings 33,951,202Accumulated other comprehensive loss (1,470,890)Total members’ equity 194,931,982Total liabilities and members’ equity $2,263,288,809

The accompanying notes are an integral part of the consolidated financial statements.



conSoliDAteD StAteMent oF incoMeFor the nine months ended September 30, 2014

unAuDiteD Jul-Sep YeAR to DAte interest income Loans to members $1,748,355 $5,331,191 Investments available-for-sale 1,033,347 2,787,891 Other 787,620 2,692,742 Total interest income 3,569,322 10,811,824

interest expense Interest on members’ share accounts 304,691 962,095 Interest on members’ share certificates 5,081 31,742 Total interest expense 309,772 993,837 Net interest income 3,259,550 9,817,987 net fee income Share draft and depository processing fees 3,980,552 12,031,051 Off balance sheet income 2,028,992 6,312,624 Other fee income 1,882,634 5,768,823 Outside processing and service costs (1,066,488) (3,272,554)Net fee income 6,825,690 20,839,944

operating expenses Compensation and employee benefits 5,470,100 16,186,840 Information technology 1,061,899 3,237,081 Office occupancy 285,456 862,542 Professional fees 267,110 756,758 Other operating expense 655,512 2,231,754 Total operating expenses 7,740,077 23,274,975

other net gainNet gain on loan prepayment — 765,170Total other net gain — 765,170 net income $2,345,163 $8,148,126




conSoliDAteD StAteMent oF coMpRehenSive incoMeFor the nine months ended September 30, 2014 unAuDiteD Jul-Sep YeAR to DAte net income $2,345,163 $8,148,126other comprehensive (loss) income Net unrealized holding (losses) gains on investments classified as available-for-sale (382,394) 584,975 total other comprehensive (loss) income (382,394) 584,975

comprehensive income $1,962,769 $8,733,101


conSoliDAteD StAteMent oF MeMBeRS’ eQuitYFor the nine months ended September 30, 2014 Accumulated perpetual other contributed undivided comprehensiveunAuDiteD capital earnings loss total Balance at December 31, 2013 $161,474,655 $26,601,559 ($2,055,865) $186,020,349Net income 8,148,126 8,148,126PCC issued 977,515 977,515PCC released due to credit union liquidation (500) (500)Dividends paid on PCC (798,483) (798,483)Other comprehensive income 584,975 584,975Balance at September 30, 2014 $162,451,670 $33,951,202 ($1,470,890) $194,931,982




1. cash and cash equivalentsCash and cash equivalents include pass-through reserves deposited with the Federal Reserve Bank of $77,816,000 as of September 30, 2014. Member credit unions’ reserve balances are included in the members’ share accounts in the consolidated statement of financial condition. Cash on deposit and cash items in the process of collection from correspondent banks and the Federal Reserve Bank are included in cash and cash equivalents in the consolidated statement of financial condition.

2. investments Available-for-SaleThe amortized cost and estimated fair value of investments available-for-sale as of September 30, 2014 are as follows: Amortized estimated unrealized cost Fair value lossAsset-backed securities $609,068,968 $609,015,254 ($53,714)Agency mortgage-backed securities 131,504,148 130,092,976 (1,411,172)Federal agency securities 3,524,307 3,518,303 (6,004)total $744,097,423 $742,626,533 ($1,470,890)

3. investments in cuSosInvestments in CUSOs are comprised of the following as of September 30, 2014:

Investment in CO-OP $2,019,893Investment in Primary Financial, LLC 1,599,271Investment in CU Business Group 734,337Investment in CU Investment Solutions, LLC 100,000total $4,453,501

Catalyst Strategic Solutions is a wholly-owned subsidiary of Catalyst Corporate. All significant intercompany balances and transactions have been eliminated in the Catalyst Corporate consolidated financial statements.

4. loans to MembersThe composition of loans to members is as follows as of September 30, 2014:

Open-end credit lines $113,170,447Term loans 219,969,051total $333,139,498

noteS to conSoliDAteD FinAnciAl StAteMentS


noteS to conSoliDAteD FinAnciAl StAteMentS (continueD)


5. Members’ Share AccountsMembers’ share accounts are summarized as follows as of September 30, 2014:

Cash management $1,672,400,749Performance tiered 214,447,990Reg D reserve 77,816,000Other shares 93,163,979total $2,057,828,718

Catalyst Corporate members transferred $3,688,588,961 to the Excess Balance Account at the Federal Reserve Bank as of September 30, 2014.

6. Regulatory capitalAs a federally-chartered corporate credit union, Catalyst Corporate is subject to various regulatory capital requirements administered by the NCUA. The table below presents Catalyst Corporate’s actual and required capital ratios as of September 30, 2014:

capital Ratio capital Denominator Ratio

Minimum level to be classified as adequately

capitalized

Minimum level to be classified

as well capitalized

Retained earnings ratio

RE DANA 1.43% 0.45% N/A

leverage ratioRE + PCC-CUSO

InvestmentsDANA 7.98% 4.00% 5.00%

tier one risk-based capital

ratio

RE+ PCC-CUSO Investments

MANRA 22.78% 4.00% 6.00%

total risk-based capital ratio

RE + PCC-CUSO Investments

MANRA 22.78% 8.00% 10.00%

RE = Retained earnings for regulatory ratios include retained earnings acquired through business combination with Georgia Corporate PCC = Perpetual contributed capital CUSO Investments = Investments in unconsolidated CUSOs DANA = 12-month average daily net assets MANRA = 12-month average net risk-weighted assets


Annual Report

Annually, Catalyst Corporate engages a third-party firm to conduct an external audit of its financial statements, including the consolidated statement of financial condition and related consolidated statements of income, comprehensive income, members’ equity, and cash flows for the prior year-end. For the period ending December 31, 2013, the CPA firm of Orth, Chakler, Murnane and Company performed this function. Catalyst Corporate’s 2013 Financial Statement Audit Report was distributed during Catalyst Corporate’s Annual Meeting on April 17, 2014 and also posted to the corporate’s web site in April.

Catalyst Corporate’s 2014 Annual Meeting was held on April 17, 2014, at 12 p.m. local time, at the Planet Hollywood Resort in Las Vegas, Nevada. Additional details are available at www.catalystcorp.org/annualmtg. The 2013 Annual Report and the 2013 Audited Financial Statements are accessible in the Due Diligence section of the Catalyst Corporate website.

To review or print Catalyst Corporate’s full 2013 Financial Statement Audit Report, visit www.catalystcorp.org/financials/ar2013.pdf.

To review or print Catalyst Corporate’s full 2013 Annual Report, visit www.catalystcorp.org/financials/ar2013full.pdf.


http://www.catalystcorp.org/duediligence.aspx


Risk Measures

cReDit RiSK

September 30, 2014

Overnight Cash $1,149,831,398 Secured Loans $333,139,498 Agency Securities $133,611,279 Student Loan $154,404,708 Auto Loan $120,489,703 Credit Card $222,987,672 Equipment $111,133,171

Risk exposure

RiSK eXpoSuReRegulAtoRY

liMitScuRRent

Interest rate risk (NEV volatility)

-20.0% -14.8%

Weighted Average Life of Financial Assets

2.00 years 0.49 years

Weighted Average Life of Financial Assets - Stress Test

2.25 years 0.52 years

Single Obligor Limits (% of Capital)

Credit Card ABS 50.0% 25.7%

Sector Limits (% of Capital)

Agency RMBS 1000.0% 67.6%


Asset Diversification (% of Assets)

Agency RMBS 50.0% 5.7%


December 31, 2013


June 30, 2014


March 31, 2014



Sep

t 201

414

.8%

June

201

4

Mar

201

4

Dec

201

3

-15%

Risk Measures

inteReSt RAte RiSK

Catalyst Corporate’s primary method of monitoring interest rate risk is through the net economic value (NEV) test. The NEV test measures the dollar and percentage potential change in the fair value of Catalyst Corporate’s capital (perpetual contributed capital, retained earnings and amortized members’ capital accounts) given a parallel, instantaneous, and permanent 300 basis point upward and downward change in the yield curve. The objective of the NEV test is to measure whether Catalyst Corporate has sufficient capital to absorb potential changes to the fair value of its balance sheet given large, sustained instantaneous interest rate shocks.

A summary of Catalyst Corporate’s NEV test at September 30, 2014 is as follows (in thousands):

NEV$ Change

in NEV% Change

in NEV

Fair value Base

$200,200 N/A N/A

Fair value +300 Bp

$170,500 ($29,700) -14.8%

Fair value -100 Bp*

$211,300 $11,100 5.5%

* Interest rates are adjusted down 100 basis points due to the low rate environment at September 30, 2014.

nev Ratio(+/- 300 BP Shock Scenarios) Maximum nev change

+300 BP Change

REGULATORY LIMIT-20%

POLICY LIMIT

Sep

t 201

4

Mar

201

4

Jun

2014

Dec

201

3

0%

2%

4%

6%

8%

10%

12%

REGULATORY LIMIT

POLICY LIMIT

BASE NEV RATIO 8.8%

LOWEST NEV RATIO 7.6%

-15%

-12%

-9%

-6%

-3%

0%

13.7

%

14.4

%

13.9

%


Risk Measures

Liquidity risk pertains to whether Catalyst Corporate has sufficient short-term assets, marketable securities, and borrowing capacity to meet member credit unions’ potential liquidity needs.

At September 30, 2014, Catalyst Corporate had $1.15 billion in cash and cash equivalents. Catalyst Corporate had access to a $130 million secured advised line of credit with the Federal Home Loan Bank of Dallas and a $30 million Fed Funds line of credit with JPMorgan Chase. There were no outstanding advances under either of these agreements at September 30, 2014.

Catalyst Corporate continues to meet members’ liquidity needs. Catalyst Corporate had outstanding loans of $333.1 million and additional uncommitted lines of credit to members of $7.8 billion at September 30, 2014. All outstanding lines of credit are collateralized by specific or general pledges by members.

excess Balance AccountCatalyst Corporate uses the Federal Reserve Bank’s Excess Balance Account (EBA) to manage excess liquidity by sweeping funds above certain thresholds to member EBAs nightly.

Below is a chart showing member share balances and the EBA balances for the month ending each of the last four quarters.

Member Share Balances

excess Balance Account

Dec 2013 $2.1 billion $4.4 billion

Mar 2014 $2.5 billion $5.8 billion

Jun 2014 $2.1 billion $4.4 billion

Sep 2014 $2.1 billion $3.7 billion

liQuiDitY RiSK

current portfolio* September 30, 2014

Assets

ASSetSpeRcent oF

BAlAnce SheetWAl

(YeARS)Loans 14.7% 1.1

ABS - Autos 5.3% 0.6ABS - Credit Cards 9.9% 0.7

FFELP Student Loans 6.8% 1.0Agency RMBS 5.7% 1.3

ABS - Equipment 4.9% 1.2SBA Pools 0.2% 4.4

Other (Non-Earning) 1.7% 0.0Overnight 50.8% 0.0

total 100.0% 0.47

WAL = Weighted Average Life*Based on a $2.263 billion balance sheet

liabilities & capital

ShAReS & eQuitYpeRcent oF

BAlAnce SheetWAl

(YeARS)Overnight Shares 91.1% 0.0

Certificates 0.2% 0.1

Member Capital 7.2% N/A

RUDE 1.5% 0.0total 100.0% 0.0

Average Life Mismatch (years) 0.47

WAL=Weighted Average Life


portfolio

AlM liMitS

SepteMBeR 30, 2014 RegulAtion cuRRent

NRSRO Rating AA or better AA- AA+

No prohibited securities None None

NEV Volatility (Base Plus) 20% 14.8%

NEV Ratio (Base Plus) 2% 7.6%

Weighted Average Life of Financial Assets (yrs) 2.00 0.49

Stressed Weighted Average Life of Financial Assets (yrs)

2.25 0.52

DiveRSiFicAtion liMitS to ASSet Size


Loans N/A 14.7%

Auto Loan Asset Backed Securities 25% 5.3%

Credit Card Asset Backed Securities 25% 9.9%

FFELP Student Loan Securities 50% 6.8%

Equipment Asset Backed Securities 25% 4.9%

Corporate Bonds 50% 0.0%

Agency Residential Mortgage Backed Securities 50% 5.7%

Agency Debt N/A 0.0%

SBA Pools 25% 0.2%

Other (Non-Earning) N/A 1.7%

Overnight Investments N/A 50.8%


portfolio

Single oBligoR liMitS to cApitAl*







* Obligor limits are set as a percentage of the corporate’s total capital. As of September 30, 2014, total capital is $192,405,215. Total capital consists of Perpetual Contributed Capital and Retained Earnings, less Investments in Unconsolidated CUSOs.

SectoR liMitS to cApitAl*







Agency Residential Mortgage Backed Securities 1000% 67.6%

SBA Pools 500% 1.8%

* Sector limits are set as a percentage of the corporate’s total capital. As of September 30, 2014,

total capital is $192,405,215. Total capital consists of Perpetual Contributed Capital and Retained Earnings, less Investments in Unconsolidated CUSOs.


Key performance Ratio graphicsR

etai

ned

ear

ning

s R

atio

YtD

op

erat

ing

E

ffici

ency

Rat

io

tier

one

Ris

k-B

ased

c

apita

l Rat

io

leve

rag

e R

atio

tota

l Ris

k-B

ased

c

apita

l Rat

io

The operating efficiency ratio is calculated as net fee income divided by operating expenses. Catalyst Corporate’s ability to cover expenses through fee income supports a business model that is less reliant on balance-sheet activity for income and therefore supports a risk-averse portfolio for the long-term. Management anticipates an operating efficiency ratio ranging from 75 to 85 percent on a long-term basis.

opeRAting eFFiciencY RAtio

RegulAtoRY cApitAl RAtioS 0%

20%

40%

60%

80%

100%

90.2

%Ju

ne 2

014

Sep

t 201

4 89

.5%

87.0

%M

ar 2

014

86.8

%D

ec 2

013

0%

1%

2%

3%

4%

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cuSos and partners

CUSOURCE, LLC, better known as Catalyst Strategic Solutions, is a wholly-owned CUSO of Catalyst Corporate that provides client credit unions with balance sheet consulting, including an SEC-registered investment advisory service, asset-liability management modeling, derivative hedging support, and related consultation. Catalyst Strategic Solutions has been in operation since 1998. As of September 30, 2014, 93 credit unions use the investment advisory service and 171 credit unions and corporates use ALM and consulting services. As of September 30, 2014, Catalyst Strategic Solutions has $4.9 billion in off-balance sheet funds under advisement.

To view the balance sheet and income statement of CUSOURCE/Catalyst Strategic Solutions, visit www.catalystcorp.org/duediligence/cuso.pdf.

cuSouRce, llc / cAtAlYSt StRAtegic SolutionS

CU Investment Solutions, LLC provides broker/dealer services to corporates and natural person credit unions. Formerly a CUSO of U.S. Central Corporate (and its successor, U.S. Central Bridge Corporate), CU Investment Solutions was purchased by its corporate users in 2011. Catalyst Corporate has an investment of $100,000 in the CUSO, which equates to an 11 percent ownership stake.

Catalyst Corporate employs registered agents to assist credit unions with securities purchases and has brokerageaccounts with approximately 267 active credit unions at present; 119 of these have done trades in the past 12 months. Catalyst Corporate’s year-to-date sales volume as of September 30, 2014, was $1.4 billion.

To view CU Investment Solutions’ audited financial statements for the current fiscal year-end, visit www.catalystcorp.org/duediligence/cuis.pdf.

cu inveStMent SolutionS, llc

CU Business Group, LLC, provides business service consultation to credit union clients in areas such as:

• Loan origination, underwriting and servicing

• Documentation and compliance

• Risk monitoring

• Independent loan review

• Business deposit services

• Education and training

• Loan participation network

• Strategic consulting and operational training

CU Business Group is owned by seven corporate credit unions. As of September 30, 2014, Catalyst Corporate owns approximately 37 percent of this CUSO and has 125 member credit unions using its services.

To view the most recent audited financial statements, visit www.catalystcorp.org/duediligence/cubg.pdf.

To view Credit Union Business Group’s full Due Diligence Package, visit www.catalystcorp.org/duediligence/cubgreport.pdf.

cReDit union BuSineSS gRoup, llc


cuSos and partners

Primary Financial, LLC is owned by 14 corporate credit unions and provides brokered certificates of deposit tonatural person credit unions nationwide, as well as a channel for these credit unions to issue certificates. CatalystCorporate has an investment of $1.6 million in Primary Financial, equating to an 8.0 percent interest in the company.As of September 30, 2014, Catalyst Corporate had SimpliCD agreements with 850 member credit unions, including 277 member credit unions actively using the service over the last 12 months, $818.3 million in certificates outstanding, and $315.3 million in sales year-to-date.

To view Primary Financial’s year-end 2013 audited financial statements, visit www.catalystcorp.org/duediligence/primary.pdf.

Alaska U.S.A. Trust Company is a Catalyst Corporate partner, facilitating the safekeeping of its members’ securities. Catalyst Corporate does not have an ownership stake in Alaska U.S.A. Trust Company, but does entrust execution of highly-regulated service activities to this partner. As a result, Catalyst Corporate monitors its financial and service performance. Alaska U.S.A. Trust Company, which operates exclusively within the credit union industry, is deeply familiar with the regulatory requirements credit unions must meet with regard to security safekeeping and due diligence of safekeeping service providers. It is competent and committed to ensuring safe and sound custodianship practices.

Catalyst Corporate has 294 members using the program that is offered in partnership with Alaska U.S.A. Trust Company, with approximately $22.1 billion in safekeeping for members and $554.5 million in corporate holdings as of September 30, 2014.

To view Alaska U.S.A.’s year-end 2013 audited financial statements, visit www.catalystcorp.org/duediligence/alaskausa.pdf.

pRiMARY FinAnciAl, llc

AlASKA u.S.A. tRuSt coMpAnY



BuSineSS continuitY SuMMARY

Catalyst Corporate’s Business Continuity Program is based on best practices established by the Federal Financial Institutions Examination Council (FFIEC), the Disaster Recovery Institute International (DRII), and the Gartner Group. Oversight is performed by a board-approved committee consisting primarily of Catalyst Corporate management and senior management. The Business Continuity Management Program and related activities are reviewed annually by the board of directors.

Catalyst Corporate utilizes a Business Continuity Lifecycle, which defines five major elements representing a specific set of tasks, procedures and outcomes that can be used as a guideline for developing a business continuity program. The five planning sections of the Business Continuity Lifecycle are:

• Analyze the business

• Assess the continuity risks

• Develop the strategy

• Develop the plan

• Exercise and maintain the plan

Catalyst Corporate performs the steps of the Business Continuity Lifecycle at least annually. Controls have been identified and implemented to help minimize or prevent potential loss from a disruption or disaster. Observations and deficiencies noted during the Continuity Risk Assessment (CRA) are documented and presented to the board of directors annually.

Catalyst Corporate attempts to minimize the impact of threats by implementation of preventative controls. In the event that preventative controls fail to protect from a threat, the overall business continuity strategy is to plan for impacts that escalate all the way through to the worst-case scenario in order to develop plans of action that are applicable to most any situation. These situations may range from non-catastrophic outages of individual computing systems or business processes to catastrophic outages that require relocation of the entire operation to the collocation site.

The following business continuity strategies provide the framework for ensuring that Catalyst Corporate can sustain critical business processes at a level acceptable to the business and to member credit unions.

Business continuity plansBusiness continuity plans are developed for each business process to document the procedures to be followed in order to achieve the minimum service level requirements and recovery time objectives. Solutions are identified for potential issues, and resources are put in place to ensure timely resolution to anticipated service disruptions.

Business units have developed and refined both continuity plans for their critical systems and exercise plans to validate those continuity plans. These plans, which are approved by senior management, collectively address a wide variety of scenarios:

• Employee Emergency Procedures provide guidance on what steps should be taken in the event certain threats occur.

• Immediate Action Items document immediate actions in disaster declaration mode both before and after arrival at the Work Area Continuity site.

• Disaster Declaration Plans address the building being indefinitely inaccessible and/or totally destroyed.

• Temporary Evacuation Plans address the evacuation of the building for a few hours.

• The Pandemic Preparedness Plan details the steps that need to be taken in the event of a pandemic event.

BackupCatalyst Corporate knows that recovery of data from magnetic media backup will take longer than what is acceptable during a disaster. To mitigate this concern, a hot-site is managed so that data is mirrored or replicated to identical equipment for rapid recovery. Additionally, systems and data are backed up as often as required and the tapes are sent off-site for long-term storage. Data backups are tested periodically to verify the backup system is working properly.


BuSineSS continuitY SuMMARY (continueD)

hot-siteThe hot-site provides a highly secured environment with connectivity to numerous telecommunication carriers and utility power that is backed up by a UPS. Redundant firewalls, routers, switches, IBM iSeries, servers and data storage devices are in place and are exercised on a regular basis to protect against prolonged service disruptions. High-speed telecommunication lines are installed to connect the hot-site to Catalyst Corporate’s Plano, Texas office for rapid transmission of high volumes of data and images. Storage Area Network (SAN) data is distributed to both the production and hot-site synchronously (active/active) significantly reducing the recovery time objective for virtualized servers. Critical physical servers are duplicated with equivalent hardware at the hot-site and the associated data is replicated in real time to its hot-site counterpart. File data is continuously mirrored to the hot-site using Common Internet File System (CIFS) replication technology.

Work Area continuity SiteCatalyst Corporate leases office space in the same building as the hot-site for the Work Area Continuity site. With direct connection to the hot-site for access to the AS/400, servers and disk storage, this site houses the necessary workstations, work area, telecommunications and network connections to continue operations in the event of a disruption. Business units maintain off-site storage of supplies and documentation needed to continue operations.

continuity exercisesCritical business processes identified in the Business Impact Analysis are exercised at least annually, and some of the more critical systems are exercised on a quarterly basis. Exercise exceptions are presented to senior management and the Internal Audit Department after each exercise. An overview of all exercises and exercise exceptions is presented to the board of directors annually.

contingency communicationsGuidelines are available that provide information on how to establish communications with Catalyst Corporate as soon as possible following an event that causes a service disruption. Credit unions and Catalyst Corporate employees maintain familiarity with these contingency communications plans by conducting quarterly exercises. To view Catalyst Corporate’s Contingency Communications guidelines, visit www.catalystcorpcc.org/ccguidelines.htm.




BuSineSS continuitY ActivitY RepoRt

exercises completed During third Quarter 2014

Service Alert Messages (SAM) sent to participating credit unionsSAM exercises are conducted semi-annually to ensure that credit union contact information for specific processes is maintained and to ensure timely communications to member credit unions regarding the nature and duration of process specific disruptions. Messages are also sent using the SAM system when services are disrupted or delayed.

• Message sent on 8/1/14

contingency communications exerciseContingency Communications Exercises are conducted semi-annually to ensure timely communications to member credit unions regarding the nature and duration of a service disruption in an effort to minimize the impact on operations. These exercises began in September 2002 with participation from a total of 153 credit unions. Catalyst Corporate now has the participation of 1,135 credit unions in these exercises (as of September 2014).

• Message sent on 9/10/14

Full Scale (Disaster Declaration) exercise Disaster Declaration Exercises are conducted at Catalyst Corporate’s collocation facility. Critical systems are either (1) exercised with data and systems at the hot site to simulate the Catalyst Corporate headquarters building being destroyed or (2) pointed back to the headquarters facility to simulate indefinite building inaccessibility by personnel. The plans are designed to accurately and objectively compare results against already established Recovery Time Objectives.

• Conducted on 10/23/14

Remote Access exercisesRemote Access Exercises are conducted on a regular basis and are used to assess employees’ ability to work remotely.

• Conducted in September 2014

Application Specific ExercisesCatalyst Corporate conducts application specific exercises of its critical systems and also simulates scenarios that are different from used during Catalyst Corporate’s full scale exercises in order to assess additional areas of coverage.

FiDelitY BonD StAteMent

NCUA Part 704.18 states that “every corporate credit union will maintain bond coverage with a company holding a certificate of authority from the Secretary of the Treasury” and “the minimum amount of bond coverage will be computed based on the corporate credit union’s daily average net assets for the preceding calendar year.”

Catalyst Corporate maintains a $10 million fidelity bond which is the coverage required by NCUA Part 704.



BAnK SecRecY Act (BSA)/oFFice oF FoReign ASSetS contRol (oFAc) SuMMARY

Catalyst Corporate is committed to fulfilling the require-ments of the BSA, the OFAC, and the USA PATRIOT Act. Catalyst Corporate’s BSA Policy is reviewed and approved by the board of directors at least annually.

Anti-money laundering procedures have been developed and implemented that enable Catalyst Corporate to meet the requirements of the BSA, OFAC, USA PATRIOT Act, and the Financial Crimes Enforcement Network (FinCEN). These procedures and controls include, but are not limited to, the following:

• Coordination and monitoring of compliance by a designated BSA compliance officer.

• A Member Identification Program designed to meet the requirements of Section 326 of the USA PATRIOT Act.

• BSA/OFAC risk assessment of Catalyst Corporate processes, products and services, and members.

• Review of unbatched transactions for the detection and reporting of suspicious activity to FinCEN.

• A documented process for analysis and reporting of suspicious activity.

• Entities, countries and individuals associated with unbatched transactions screened for potential matches against OFAC lists.

• Review of member accounts in accordance with Section 314(a) of the USA PATRIOT Act.

• Monthly reporting of BSA and OFAC activity to the board of directors.

• Ongoing training of appropriate personnel.

• Independent testing and monitoring of compliance.

• Recordkeeping and record retention.

• An annual review of policies, procedures and risk assessments.

• Checks and balances, including a query validation process, a retention validation process, and the use of dual control.


privacy and Security

Affidavit Regarding Part 717

DeScRiption oF the pRivAcY AnD SecuRitY AFFiDAvitS

The Affidavits below are provided to assist member credit unions with their due diligence and compliance with NCUA Rules and Regulations Parts 717 and 748 and CFPB Regulation P Part 1016.

Catalyst Corporate places a high priority on security, and utilizes security measures to protect not just nonpublic personal information and information about “covered accounts” (as defined in Part 717), but all types of confidential information that it receives from its member credit unions.

Under Part 717 of the NCUA’s Regulations, Catalyst Corporate is deemed to be a “service provider” to its member credit unions. Catalyst Corporate is providing this Affidavit in order to assist member credit unions in their compliance with Part 717. The Affidavit is written in general language so that member credit unions can utilize the Affidavit regardless of the level of complexity of their security programs.

Catalyst Corporate utilizes policies and procedures, developed by the corporate, that are designed to prevent, detect and mitigate the risk of security breaches that could result in a member of a credit union, or any other person, being exposed to identity theft. These policies and procedures will apply to all circumstances in which Catalyst Corporate processes or otherwise has access to confidential information, whether in connection with providing services for a “covered account” held at a credit union or otherwise.

• Catalyst Corporate agrees not to use nonpublic personal information about any credit union’s members, or about any other person, for any purpose other than those purposes for which the credit union disclosed the information to Catalyst Corporate,

including servicing and processing of transactions in the ordinary course of business.

• Catalyst Corporate will utilize security measures that Catalyst Corporate deems to be appropriate for the protection of nonpublic personal information about credit union members and other persons, with particular attention to protection against unauthorized access to or unauthorized use of such information that could result in substantial harm or inconvenience to any credit union’s members or to any other person.

• Catalyst Corporate has an Incident Response Plan in place that provides guidance for our response if a security breach occurs. If an incident occurs that involves unauthorized access to or unauthorized use of nonpublic personal information about any credit union’s members or about any other person, Catalyst Corporate will take actions that Catalyst Corporate deems to be appropriate, including notification to the affected credit union as soon as possible of any such incident.

• Catalyst Corporate will utilize security measures designed to accomplish the proper disposal of nonpublic personal information held by Catalyst Corporate. If immediate deletion or disposal of the nonpublic personal information held by Catalyst Corporate is not feasible, then until the date when deletion or disposal of the information occurs, Catalyst Corporate will continue to utilize security measures designed to protect the information against unauthorized access and against unauthorized use.


privacy and Security

Catalyst Corporate places a high priority on security, and utilizes security measures to protect not just nonpublic personal information, but all types of confidential information that it receives from its member credit unions.

Under Part 1016 (Regulation P) of the Consumer Financial Protection Bureau’s Regulations and Part 748 of the NCUA’s Regulations, Catalyst Corporate is deemed to be a “service provider to its member credit unions. Catalyst Corporate is providing this Affidavit in order to assist member credit unions in their compliance with Part 1016 and Part 748. The Affidavit is written in general language so that member credit unions can utilize the Affidavit regardless of the level of complexity of their security programs.

Catalyst Corporate agrees not to use nonpublic personal information about any credit union’s members, or about any other person, for any purpose other than those purposes for which the credit union disclosed the information to Catalyst Corporate, including servicing and processing of transactions in the ordinary course of business.

Catalyst Corporate will utilize security measures that Catalyst Corporate deems to be appropriate for the protection of nonpublic personal information about credit union members and other persons, with particular attention to protection against unauthorized access to or unauthorized use of such information that could result in

substantial harm or inconvenience to any credit union’s members or to any other person. Catalyst Corporate’s security program establishes standards for the protection of information assets. These standards are intended to be consistent with Part 748 of the NCUA rules and regulations. The program includes a data classification to protect information assets. In addition, Catalyst has a risk assessment process in place to evaluate risks, including security related risks.

Catalyst Corporate has an Incident Response Plan in place that provides guidance for our response if a security breach occurs. If an incident occurs that involves unauthorized access to or unauthorized use of nonpublic personal information about any credit union’s members or about any other person, Catalyst Corporate will take actions that Catalyst Corporate deems to be appropriate, including notification to the affected credit union as soon as possible of any such incident.

Catalyst Corporate will utilize security measures designed to accomplish the proper disposal of nonpublic personal information held by Catalyst Corporate. If immediate deletion or disposal of the nonpublic personal information held by Catalyst Corporate is not feasible, then until the date when deletion or disposal of the information occurs, Catalyst will continue to utilize security measures designed to protect the information against unauthorized access and against unauthorized use.

Affidavit Regarding Part 1016 (Regulation P) and Part 748


Catalyst Corporate is committed to the confidentiality, integrity and availability of its operations, information, information systems and members’ information. To meet these objectives, Catalyst Corporate has implemented and continues to develop internal controls. To demonstrate compliance with these controls, Catalyst Corporate engaged a firm to perform an SSAE16 review for the period April-September 2013. The Service Organization Controls (SOC1) report covers controls placed in operation and tests of operating effectiveness.

The SSAE16/SOC1 review is available to credit unions who contact Member Services at [email protected] or 800.442.5763, option 1. The report also may be downloaded from TranZact by authorized users.

SSAe16 StAteMent

texas

6801 Parkwood Blvd.Plano, TX 75024

214.703.7500 800.442.5763

georgia

6705 Sugarloaf Pkwy., Suite 250

Duluth, GA 30097770.476.9704800.768.4228

california

2855 E. Guasti Road, Suite 600

Ontario, CA, 91761214.703.7500 800.442.5763

hawaii

1654 South King StreetHonolulu, HI 96826

214.703.7500 800.442.5763

Documents

Due Diligence RepoRt - Catalyst Corporatecatalystcorp.org/Contents/DueDiligence_Pdf/DDRQ314.pdf · Due Diligence RepoRt third Quarter 2014. Please note: hyperlinks in this\rdocument