Business Plan

Business
Plan
Catalyst Corporate Federal Credit Union
2012 Strategic Business and Capital Plan
Table of Contents
Introduction .................................................................................................................................................................... 2
Background: Developing a Member Driven Solution
Georgia Corporate ......................................................................................................................................... 4
Southwest Bridge Corporate .................................................................................................................... 6
Western Bridge Corporate ........................................................................................................................ 9
CUNA’s Corporate Credit Union Working Group......................................................................... 10
Organizational Overview
Organizational Structure ......................................................................................................................... 11
Efficiency and Scalability......................................................................................................................... 15
Member Focus .............................................................................................................................................. 17
Governance .................................................................................................................................................... 19
Products and Services............................................................................................................................... 21
Capitalization ................................................................................................................................................ 25
Plan Status ...................................................................................................................................................... 34
Financial Performance
Model Balance Sheet.................................................................................................................................. 36
Projections ..................................................................................................................................................... 39
Exhibit A: Catalyst Corporate’s Organizational Chart .............................................................................. 41
Exhibit B: Catalyst Corporate’s Products and Services............................................................................ 42
Exhibit C: Catalyst Corporate’s Model Balance Sheet ............................................................................... 43
Exhibit D: Catalyst Corporate’s Financial Projections ............................................................................. 44
1
Catalyst Corporate Federal Credit Union Business Plan
Introduction
Catalyst Corporate Federal Credit Union is a $2.0 billion wholesale financial cooperative
located in Plano, Texas with a regional sales office in Duluth, Georgia. Catalyst Corporate
arose from the merger of Southwest Bridge Corporate Federal Credit Union and Georgia
Corporate Federal Credit Union. Catalyst Corporate has a national field of membership,
provides wholesale financial services to 1,278 member and non-member credit unions
either directly or through its CUSO – Catalyst Strategic Solutions. Nearly 900 capitalizing
member institutions have invested in Catalyst Corporate through subscriptions to
Perpetual Contributed Capital (PCC). Catalyst Corporate offers a wide array of
correspondent, payment, investment and liquidity products and services.
In February2011 Southwest Bridge Corporate and Georgia Corporate submitted a Strategic
Business and Capital Plan (Business Plan) to its membership and the NCUA’s Office of
Corporate Credit Unions (OCCU). This Business Plan described the creation of Catalyst
Corporate through consolidation and a new business model that would lead to sufficient
capitalization and retained earnings growth to meet the requirements of the NCUA’s Rules
and Regulations Part 704 (Regulation 704), which was substantially revised in September
2010. Plan components were stated as follows:
1) Consolidation of Southwest Bridge Corporate and Georgia Corporate operations
2) Formation of a scalable, low-cost provider of products and services strategically
positioned to increase product and service volumes
3) Creation of a smaller balance sheet and lower member-contributed capital
requirements
4) Limited deposit access to overnight investment accounts
5) Restricted issuance of share certificates
6) Potential transition from U.S. Central products and services
Following the acceptance of the Business Plan, the two corporates raised sufficient capital
to meet the objectives of the plan, the merger was consummated, and Catalyst Corporate
came into being on September 6, 2011.
Shortly thereafter Catalyst Corporate developed a new Private Placement Memorandum
(PPM) for PCC that will allow additional credit unions to join as capitalizing members on an
ongoing basis. To accompany this capital offering, the Business Plan has been updated to
eliminate references to events that have already occurred, revise details that have changed,
and confirm other information that was uncertain at the time the first plan was distributed.
A significant development impacting the Catalyst Corporate Plan is its successful bid in late
2011 to acquire the operations of Western Bridge Corporate. The bid proposal was
solicited by the NCUA in its pursuit of an optimal transition for former Western Bridge
member credit unions after determining that sufficient capital would not be raised to
2
launch United Resources Corporate—the intended Western Bridge replacement. The
NCUA announced that Catalyst Corporate had won the bid to acquire Western Bridge
Corporate’s operations on December 14.
Catalyst Corporate is the best solution for transitioning Western Bridge member credit
unions for several reasons, including: numerous shared platforms and systems (such as the
data processing and core item processing solutions), the ability to replace 100 percent of
Western Bridge Corporate’s products and services, familiarity with the Western Bridge
Corporate operations, proven scalability, and meaningful experience with corporate
consolidation.
The proposal calls for all Western Bridge Corporate products and services to be
consolidated into Catalyst Corporate’s existing operations, systems, processes and account
structures. The additional volumes arising from this transition, handled efficiently with
appropriate additional resources, have a positive impact on the projected financial
performance of Catalyst Corporate. Catalyst Corporate achieved well-capitalized status in
October 2011, ahead of schedule, and is on track to meet all NCUA retained earnings and
capital ratio requirements over the next 10 years. This consolidation and expansion will
further accelerate achievement of future retained earnings requirements and will benefit
all Catalyst Corporate members through greater flexibility for investing in new products
and technologies to help natural person credit unions meet their own members’ needs.
The time line for achieving the integration spans January-June 2012.
3
Background: Developing a Member Driven Solution
In response to the market crisis and the sweeping losses sustained by corporates, as well as
early intelligence about the likely changes to Regulation 704, the Boards of Directors and
Management of Southwest Corporate and Georgia Corporate began to evaluate business
models in late 2009. The corporates, working independently, shared an objective of
identifying a strategy that would enable each to succeed in serving their members well into
the future despite capital depletions. Both corporates relied on feedback from their
respective membership in outlining the characteristics of a business model that would be
successful and that credit unions would support.
Georgia Corporate
Annually, Georgia Corporate’s Board of Directors engaged in a robust strategic planning
exercise, including an evaluation of environmental and operational factors and proposed
responses to ensure successful future performance. In 2009, the Board recognized a need
to expand this process to include a comprehensive assessment of the business model itself
in order to address the significant loss of capital experienced during the year and the
introduction of new, challenging regulatory provisions. The Board identified six potential
business models for further analysis and directed management to engage member credit
unions in the process of choosing a strategic direction that would provide the most value to
Georgia Corporate’s current membership.
By January 2010, three planning groups had been established.
1. Advisory Council – Comprised of CEOs of the seven largest credit unions in Georgia,
the Advisory Council was established to ensure that requirements of the corporate’s
largest depositors would be met. The seven credit unions represented on this
council made up 72.00 percent of Georgia Corporate's deposits and generated a
significant portion of its fee income.
2. Strategic Steering Committee – Comprised of senior executives (mostly CFOs) from
the Advisory Council credit unions, the Steering Committee met frequently and was
highly engaged in the planning process, suggesting additional business models for
consideration and providing feedback on criteria and modeling assumptions over a
period of six months.
3. Member Focus Group – The Member Focus Group was comprised of 15
representatives from credit unions ranging from $15 million to140 million in assets.
This group provided feedback on the underlying assumptions driving the business
model and Strategic Steering Committee recommendations. The Focus Group
4
offered a unique perspective from credit unions that are generally more dependent
on Georgia Corporate for critical support.
The first order of business for the Strategic Steering Committee was to establish objective
criteria for use in ranking the numerous business model scenarios under consideration. Six
Model Ranking Criteria were identified and defined. They were:
•
•
•
•
•
•
Feasibility of Establishing the Structure
Minimum Capital Investment
Provides Economies of Scale (pricing/efficiencies)
Provides Value to Members
Allows for Migration to Off-Balance Sheet Investing
Completeness of Product Offering
After establishing and clearly defining all of the Model Ranking Criteria, the Strategic
Steering Committee weighted them to ensure that appropriate consideration would be
given to each in the final analysis. The Model Ranking Criteria also provided a useful
framework for discussing the business model scenarios throughout the six-month process.
Initially, the Advisory Council had requested an analysis of Georgia Corporate’s ability to
operate profitably as a stand-alone entity by reducing the balance sheet size and brokering
member deposits that exceed the minimum balance required for settlement. The analytical
model demonstrated conclusively that due to a deep reduction in spread income and
additional expenses associated with replacing vital U.S. Central services and support, the
corporate would not be able to produce retained earnings sufficient to meet then-proposed
NCUA regulatory targets.
The Steering Committee turned its focus to business model scenarios that would
incorporate consolidation in order to achieve the scale necessary to overcome these
hurdles. The next phase of analysis examined several distinct consolidation scenarios: a
regional corporate (merging together with existing partners in the region), a “hub and
spoke” model (merge together several smaller “clean balance sheet” corporates, with
Georgia Corporate as the primary headquarters), or merge with one or more corporates
that already possessed a substantially larger infrastructure.
Throughout the planning process, management was actively engaged in discussions with
corporate credit unions throughout the nation, presenting a vision for collaboration and
seeking avenues for partnership or merger to gain the efficiencies necessary for success.
Most corporates generally were intrigued by the opportunities but were not ready to make
commitments to a concrete strategy. Ultimately, further analysis demonstrated that the
regional corporate and the hub-and-spoke model, while profitable, would fall short of
NCUA capital targets over time.
5
The outcome of these discussions along with modeling results compelled the Strategic
Steering Committee to focus on consolidation with one or more “Tier One” corporates –
defined as a corporate that possesses significant scale and little reliance on U.S. Central.
Potential partners were assessed based on efficiency (as measured by the coverage ratio
which is the percentage of operating expense covered by fee income) and member service
philosophy. Protection from legacy assets was acknowledged as a key criterion, though the
ultimate resolution to this issue was not known at the time.
By July 2010, Georgia Corporate’s Board of Directors had approved the Strategic Steering
Committee’s recommendation to approach Southwest Corporate as the primary
consolidation partner, along with the potential to include one additional Tier One
corporate and two other regional partners – none of which ultimately committed to the
plan. The first in-person meeting of the leadership of Georgia Corporate and Southwest
Corporate was on September 2-3. This launched the process of integrating the financial
models and projections of the two corporates, which were remarkably similar. Initiating
these discussions early placed Georgia Corporate in an excellent position to continue
working with Southwest Bridge Corporate’s management following conservatorship
without losing momentum. On December 2, Georgia Corporate made an official
announcement of its plan to consolidate with Southwest Bridge Corporate and to pursue a
new, small-balance sheet business model with low member capitalization requirements.
Southwest Bridge Corporate
On September 30, 2010, Southwest Bridge Corporate held a membership update webinar
and asked for volunteers to serve on the Member Advisory Council (“Council”). An update
letter was distributed to all member credit unions on October 4, 2010 asking for volunteers
to serve on the Council. Southwest Bridge Corporate received 141 volunteers from member
credit unions and all were placed on the Council.
On October 15, 2010, Southwest Bridge Corporate’s Member Advisory Council met to
establish its mission, which was to advise credit unions of the best plan to transition
Southwest Bridge Corporate’s entire operations to a new entity. The responsibilities of the
Council were:
•
•
•
Explore future business models for Southwest Bridge Corporate with the end result
being one that is in the best interests of member credit unions.
Determine the best business model that aligns the interests of the members and
provides sufficient value for credit unions to support.
Recommend a plan of action to credit unions and based on their commitment,
approach NCUA with a credit union recommended business plan for the future of
Southwest Bridge Corporate.
6
•
Promote the best option for Southwest Bridge Corporate among fellow credit
unions.
Several Southwest Bridge Corporate Council members volunteered to serve on an
Executive Committee. The Council appointed a 13-member Executive Committee to
provide direction to Southwest Bridge Corporate’s senior management team for the
purpose of identifying and evaluating potential future business models.
The Executive Committee determined that the primary objectives of the final business
model will:
•
•
•
•
•
Provide a full menu of services to reduce the impact on Southwest Bridge
Corporate’s members
Require a lower level of capital contributed from member credit unions
Keep credit union ownership and control
Ensure competitive pricing with high quality service
Maintain the capacity for ongoing aggregation
The Executive Committee directed Southwest Bridge Corporate’s senior management to
identify and evaluate future business models. At a subsequent meeting, the Executive
Committee presented its findings and recommendations to the Council. In all, the Executive
Committee met three times in October 2010 and November 2010 to review information
and analysis of six potential business models and to discuss the strengths and weaknesses
of each business model option. The six business model options reviewed by the Executive
Committee were:
•
•
•
•
•
•
Consolidate with a non-credit union entity(s)
Consolidate with an existing CUSO(s)
Establish a new regional CUSO
Establish a new national CUSO
Charter a new corporate credit union
Consolidate with an existing corporate credit union
After careful consideration the Executive Committee determined that the best future
business model for Southwest Bridge Corporate was consolidation with an existing
corporate credit union, namely, Georgia Corporate.
The Executive Committee identified several key factors in the decision to pursue a
consolidation with Georgia Corporate. These are:
•
•
An existing federal charter that would expedite a transition from the bridge
corporate
No exposure to legacy assets
7
•
•
•
•
Eliminate potential product and system conversions for approximately 1,100
Southwest Bridge Corporate member credit unions that are service subscribers
Improved operating efficiencies
Governance structure that represents the Consolidated Corporate’s entire
membership including the seven core states of Southwest Bridge Corporate
Maintaining operations in Plano, Texas
On November 30, 2010, a second Member Advisory Council meeting was held via webinar.
At the meeting the Executive Committee presented its findings to the entire Council and
issued a final business model recommendation. The business model recommendation
included the following two components:
•
•
Pursue a consolidation with Georgia Corporate. The consolidation likely will occur
by July 2011 with capital raising initiatives in May or June 2011. Governance of the
Consolidated Corporate will be comprised primarily of Southwest Bridge Corporate
members and the new board of directors will select the new CEO. The headquarters
and operations of the Consolidated Corporate will remain in Plano, Texas.
The Council approved a capital formula of 0.25 percent of assets with a maximum
cap of $750,000 for credit unions over $750 million, an intermediate cap of
$600,000 for credit unions between $240 million and $750 million in assets, and a
proportional threshold for credit unions $50 million or less in assets. The required
capital is perpetual with no annual adjustment and is an investment that pays a
dividend.
The Council overwhelmingly approved the Executive Committee’s recommendations to
pursue a consolidation with Georgia Corporate and to adopt the capital formula as outlined
above. Of the 107 Council members that voted, 98 voted in favor of the recommendation.
To solicit broader member credit union input on the Member Advisory Council’s
recommended business model, two additional webinars were held in December, for which
240 credit unions were in attendance. The discussion included an overview of advantages
and disadvantages of the six business models considered by the Member Advisory Council.
The webinar also presented the member-contributed capital formula, details about the
proposed product offerings, necessary balance sheet changes, the plan to consolidate with
Georgia Corporate, and financial projections.
Of the 240 member credit unions that attended one of the two webinars, 187 responded to
a survey question asking them about their willingness to support the plan recommended
by the Member Advisory Council. Of the 187 respondents, 133 (71.00 percent) responded
“yes,” 11 (6.00 percent) responded “no,” and 43 (23.00 percent) responded “undecided.”
8
Subsequently, a Special Member Meeting was held in January 2011 to discuss the proposed
business model for the future of Southwest Bridge Corporate. More than 230 member
credit unions attended the meeting via webinar. After presentation of the plan details,
member credit unions were asked to vote either through a ballot provided to them in
advance or electronically during the session. Again, the member vote supported the new
model and consolidation with Georgia Corporate as recommended by the Member
Advisory Council. The results are as follows:
540 Votes cast = 39.0 percent of membership
493 Approve = 91.3 percent of votes cast
28 Do not approve = 5.2 percent of votes cast
19 Undecided = 3.5 percent of votes cast
Finally, the Southwest Bridge Corporate membership voted explicitly to approve the
planned merger with Georgia Corporate on August 3, 2011 date, with 98% of the 685
voting credit unions casting a ballot in favor.
Western Bridge Corporate
While Catalyst Corporate was coming together as the solution for Southwest Bridge
Corporate and Georgia Corporate members, Western Bridge Corporate underwent a
similar, member-driven planning process. The Western Bridge member advisory group
established a plan to come out of bridge as an independent operation with a new charter, to
be called United Resources Corporate Federal Credit Union. An Organizing Board of
Directors, made up of credit union leaders who volunteered to sponsor the new charter,
was named. The “Forward Together” business plan for United Resources described a model
that was similar to that of Catalyst Corporate, including a lower capitalization requirement
and small balance sheet, a focus on settlement and payments.
By late summer 2011 Western Bridge had not received sufficient capitalization pledges to
successfully launch United Resources Corporate—with $82 million in subscriptions from
264 members versus a stated goal of $200 million by August 31st. On September 1, the
NCUA announced its contingency strategy for Western Bridge Corporate, inclusive of a
competitive bid process whereby it hoped to attract a third party capable of acquiring the
entire Western Bridge operation through a package transaction. After initial exploration,
the NCUA announced that it would accept bids from four corporate credit unions, as
corporates would provide the best opportunity to continue offering Western Bridge
Corporate products and services without disruption. Bid proposals were due to the agency
in early November following a brief due diligence period. Ultimately, the NCUA selected
Catalyst Corporate as the acquirer, announced on December 14, 2011.
Catalyst Corporate plans to work closely with Western Bridge Corporate staff, its member
advisors, and the NCUA to ensure a successful transition by June 30, 2012.
9
CUNA’s Corporate Credit Union Working Group
While corporates were working with membership planning groups to create strategies for
the future, CUNA established a Corporate Credit Union Working Group to develop a
consensus recommendation for the future of the Corporate Network. The CUNA Working
Group delivered its official report on August 26, 2010, concluding that:
•
•
•
•
Corporate services should be system owned and controlled by credit unions to
ensure long-term value.
Alternatives to corporates are available, but they are more costly and less service
driven.
Efficiency in the provision of corporate services is paramount, though substantial
redundancies exist in Corporate Network.
Fewer corporates, employing fewer staff, providing less local service, is a necessity if
corporates will continue to be viable and valued providers of service.
Since the report was delivered, just 16 months ago, the following events have occurred
within the Corporate Network:
• 2 mergers completed
• 5 mergers pending
• 2 self-liquidations
• 2 involuntary liquidations
In 2012, approximately 15 corporates will remain—representing very rapid progress
toward achieving the vision set out by the CUNA Working Group. The consolidation of
Catalyst Corporate and Western Bridge Corporate, in particular, will have a tremendous
impact on improved efficiency that will benefit credit unions across the country, while
adhering to the member-owned cooperative business model.
10
Organizational Overview
Organizational Structure
Catalyst Corporate’s headquarters are located in Plano, Texas, which facilitates seamless
continuance of pre-consolidation product offerings and service levels with the
management expertise and support of experienced professionals. In addition, Catalyst
Corporate has a satellite office in Duluth, Georgia where six employees are charged with
sustaining Georgia Corporate’s industry-leading market share through proven relationship
management practices, and with expanding the Catalyst Corporate footprint throughout
the southeastern region of the United States. Catalyst Corporate employs a team of
member-facing staff in the Portland, Oregon area to support credit unions in Washington
and Oregon, and has a senior account executive in Oklahoma. Plans include a local presence
in California and Hawaii, made up primarily of member-facing staff, to serve new member
credit unions added through its consolidation with Western Bridge Corporate.
An organizational chart in Exhibit A provides an overview of the departmental structure.
Management
While the Board of Directors is conducting a national search to identify Catalyst
Corporate’s new President/CEO, the corporate and its members benefit from the
expertise of a team of experienced senior officials.
Dianne Addington –President/Chief Executive Officer
Dianne Addington is president/CEO of Catalyst Corporate, having been appointed by
the NCUA to serve as chief executive of Southwest Bridge Corporate during the
strategic planning process leading to the launch of Catalyst Corporate. With
ultimate responsibility for fulfilling the corporate’s mission, Ms. Addington provides
direction and leadership to Catalyst Corporate’s five senior executive officers in the
achievement of the company’s strategy, goals and objectives. She also helps the
Board of Directors accomplish its governance functions and is a member of Catalyst
Corporate’s Asset/Liability Management Committee. Ms. Addington recently retired
from Genisys Credit Union after 37 years of service, during which time she was
president/chief executive officer for 22 years. She was a summa cum laude business
graduate of Cleary College in December 1992. She received her masters of science
degree in business administration from Central Michigan University in May 1998.
Prior to retirement, Ms. Addington served on the Board of Regents for the Auburn
Hills Campus of Baker College, the National Board of Directors for Credit Union
Shared Branching, the National Board of Directors for Co-op Network, the
Community Impact Committee for United Way of Southeastern Michigan, and the
11
Oakland County Committee for United Way. Throughout her career, Ms. Addington
has served on multiple boards of directors and committees inside and outside of the
credit union movement.
Bruce Fox – Executive Vice President/Chief Investment Officer
Bruce Fox joined Southwest Corporate Federal Credit Union in 1991. As executive
vice president/CIO of Catalyst Corporate, Mr. Fox directs the asset/liability
management, lending and investment management functions, and is responsible for
the development of all balance sheet management and derivative strategies.
Additionally, Mr. Fox is the operating principal for Catalyst Strategic Solutions (a
corporate CUSO that is wholly-owned by Catalyst Corporate), which provides
investment advisory services and asset/liability management reporting and
consulting services to credit unions. Mr. Fox has been actively involved in the
financial markets for more than 25 years. He is currently a board member of CU
Business Group, LLC and CU Investment Solutions, LLC. Prior to joining Catalyst
Corporate, he was an investment portfolio manager for Members Insurance
Company in Dallas, Texas. He also worked in various capacities with two regional
brokerage firms. Mr. Fox received a bachelor of business administration degree in
finance and a master of business administration degree in finance, both from Texas
A&M University at Commerce. He also holds NASD Series 7, 24, 27, 53, 63 and 65
licenses. He is a member of Catalyst Corporate’s Asset/Liability Management
Committee and is the chairman of the corporate’s Member Loan Committee.
Greg Moore – Executive Vice President/National Sales
Greg Moore began working for Georgia Corporate Federal Credit Union in March
2002 as the president. CEO, and is now executive vice president of national sales for
Catalyst. He is responsible for engaging credit unions, corporates, leagues, and other
system participants throughout the country to forge mutually beneficial
partnerships. As the chief executive of Georgia Corporate, Mr. Moore was actively
engaged in transitioning the corporate into a full-service institution during his
tenure. Mr. Moore guided Georgia Corporate through a visionary strategic planning
process that culminated in development of a viable new business plan at the leading
edge of the industry’s reconfigured value proposition—including a merger with
Southwest Bridge Corporate. Mr. Moore is active in the credit union industry. He
was instrumental in the establishment of Primary Financial, LLC and continues to
serve on its board today. He is a member of the Association of Corporate Credit
Union’s executive committee, and he previously served on U.S. Central’s board of
directors and its supervisory committee. Prior to joining Georgia Corporate, Mr.
Moore spent 16 years at U.S. Central in Kansas, where he held numerous positions
12
including portfolio manager, asset/liability; managing director, investment sales;
and vice president, relationship management and member services. He has a
bachelor's degree in business administration from the University of Kansas.
Brad Ganey – Senior Vice President/Chief Operating Officer
Brad Ganey joined Southwest Corporate in 2000 and has more than 25 years of
experience in the financial services industry. As senior vice president/COO of
Catalyst Corporate, he directs all payments-related services including Item
Processing (IP), Electronic Payments, and Correspondent Services. In this capacity,
Mr. Ganey oversees the corporate’s IP operations, support services,
research/adjustments, IP projects/implementation, wire transfer, automated
clearinghouse (ACH), remote deposit support, and card services (ATM/debit)
operations. His responsibilities also include overseeing the member services, sales
and marketing departments. Mr. Ganey is a board member of WesPay, a regional
payments association. His background includes seven years in commercial banking
where he served as an operations analyst and held various management positions in
the item processing and cash management areas. Mr. Ganey was employed
previously by the Federal Reserve Bank of Atlanta’s Jacksonville Branch, where he
served in various management roles at the Branch and District level. He attended
Jacksonville University, majoring in business administration.
Brent Smith – Senior Vice President/Chief Risk Officer
Brent Smith joined Southwest Corporate Federal Credit Union in 1990. He heads
Catalyst Corporate’s risk management department, which evaluates the corporate’s
investment, derivative, lending, item processing, and correspondent service
activities. This department, using management control processes, safeguards the
corporate’s resources and ensures compliance with regulation, policies and
practices. Mr. Smith is also responsible for office services, which includes facilities.
He is a member of Catalyst Corporate’s Asset/Liability Management Committee and
its Enterprise Risk Management Committee. Previously he served as the chairman
of the Compliance Clearing House Advisory Committee of the Association of
Corporate Credit Unions and is currently a member of the North American
Asset/Liability Management Association. Prior to his current position at Catalyst
Corporate, Mr. Smith managed the asset/liability management, credit, and
compliance functions at the corporate. He came to Southwest Corporate Federal
Credit Union with extensive experience in portfolio management and in
asset/liability management. He has held similar positions with American Federal
Bank and Murray Federal Savings, both located in Dallas. Brent received his
13
bachelor’s and master’s degrees in economics from the University of North Texas,
where he has taught microeconomics and money & banking.
Melissa Wardell – Senior Vice President /Chief Financial Officer
Melissa Wardell is responsible for the financial and accounting, human resources,
and information technology departments of Catalyst Corporate. Included among her
responsibilities are internal and external financial reporting, financial planning,
payroll and benefits and all aspects of the technology activities of the corporate. Ms.
Wardell is a member of Catalyst Corporate’s Asset/Liability Management
Committee, Enterprise Risk Management Committee, and its Technology Steering
Committee. Prior to becoming CFO in December 2006, Melissa served as Southwest
Corporate Federal Credit Union’s Controller. Before joining Southwest Corporate in
1994, Melissa was a Senior Auditor for Price Waterhouse. Melissa received both her
bachelor of science and master of science degrees from the University of North
Texas, and she is a Certified Public Accountant.
14
Efficiency and Scalability
Combining the back offices of corporate operations into the Catalyst Corporate
headquarters is a primary driver of operational efficiency. As a result of the consolidation
of Georgia Corporate and Southwest Bridge Corporate, along with business model
refinements, the combined Catalyst Corporate expenses are substantially lower than what
would have been required to operate the individual corporates previously. Further,
consolidating Western Bridge Corporate’s operations will reduce operating expenses by 53
percent relative to running Catalyst Corporate and Western Bridge Corporate operations
separately.
Catalyst Corporate’s coverage ratio (the portion of expenses covered with fee income) is
expected to range from 77-87 percent over the course of a conservative ten-year
projection. This strong coverage ratio allows for limited reliance on the balance sheet for
generating income, which reduces risk and ensures that Catalyst Corporate can maintain
stable, competitive pricing. Further, the efficiency afforded by scale is perpetuated by close
management of operating expenses, deployment of new technologies, and remaining
focused on core competencies.
When the initial capital raise was completed, management worked quickly to “right-size”
Catalyst Corporate to match resources to the anticipated income stream and workload tied
directly to capitalizing credit union volumes. The objective in doing so was to ensure that
all future retained earnings goals necessary to achieve success would be met over time.
Ultimately, the combined forces of Southwest Bridge Corporate and Georgia Corporate
were reduced from 216 to 164 employees. Making these changes demonstrates a
commitment to stewardship of member resources as well as years of experience in
managing through the ebb and flow of volumes. Catalyst Corporate’s management has a
firm grasp on the specific human resource requirements to ensure that its critical lines of
business are handled safely and fully supported. As a result, its operations are highly
scalable, whether changes occur through organic growth or further consolidation.
Due to its scalable model Catalyst Corporate can effectively manage resources to maximize
efficiency while still ensuring smooth payments operations as volumes increase. Presently,
Catalyst Corporate has processing volumes that are substantially below proven capacity
levels, as a result of attrition and a general decline in check usage. For example, Catalyst
Corporate’s historical aggregate share draft payments volume for its highest month was
approximately 34 million items. If 100 percent of Western Bridge Corporate’s current
members choose to join Catalyst Corporate, the combined share draft payments volume
would be approximately 22 million items, or 65 percent of the previous peak.
It is estimated that a total of 207 employees will be required to successfully operate
Catalyst Corporate following the integration of Western Bridge Corporate member credit
15
unions, assuming (conservatively) that all Western Bridge members are transitioned to
Catalyst initially, and approximately 284 will capitalize and remain full-service users of the
payment and settlement services.
16
Member Focus
Just as important, Catalyst Corporate has people on the ground throughout the nation to
ensure that it is capable of providing support to members at every level – including inperson engagement. The reductions in force that took place in 2011 did not have a
negative impact on the proportion of member-facing staff, as it actually grew slightly from
48 percent to 50 percent. This proportional level of member-facing staff will be sustained
following consolidation with Western Bridge Corporate as well—one of many ways
Catalyst Corporate will ensure that Western Bridge Corporate members do not experience
any diminishment to their service levels. See the organizational chart in Exhibit A for
details regarding the disposition of staff.
As a member-owned institution, Catalyst Corporate shares the credit union philosophy.
Because this philosophy permeates the corporate culture, it is evident in everyday actions
and decision-making as well as overarching strategies set by the volunteer Board of
Directors. Members were the driving force behind the strategy to merge Southwest Bridge
Corporate and Georgia Corporate, and to refine the business model in a way that achieves
member-focused objectives, including continuity of service, a comprehensive range of
products and services at competitive prices, and a lowered capital requirement. Members
also made it clear that the corporate they would support with capital dollars should be
positioned for future growth, including additional consolidation, to maximize the long-term
value of ownership—an objective that the Board and management of Catalyst Corporate
are already achieving through the acquisition of Western Bridge Corporate.
In the future, Catalyst Corporate is committed to continuing this deep engagement with its
members. In September Catalyst Corporate announced preparations to launch Catalyst
Councils made up of credit union representatives from throughout the corporate’s national
membership base. The feedback generated from these Councils will be used to make
decisions about the use of corporate resources. They will focus on the areas of service and
new products and enhancements. To ensure representative, active participation, Catalyst
Corporate has developed organizing parameters:
•
•
•
•
Three regional Councils: Eastern U.S., Central U.S. and Western U.S.
12 members per Council
Asset group representation:
o Under $50 million
o $51 million-$150 million
o $251 million-$750 million
o Over $750 million
Term limits
17
•
An application process for considering the potential contributions of each interested
party.
By year-end 2011 it is anticipated that the Catalyst Councils will be in place and plans
underway for the first meeting, slated to occur in the first quarter of 2012.
As always, Catalyst Corporate staff will be readily accessible to members for outstanding
operational support, while at the same time seeking opportunities to enhance outreach,
such as through increased participation in chapter meetings, the establishment of a
speakers’ bureau, and internal coordination of communication efforts among the memberfacing teams. Catalyst Corporate’s management will work closely with credit union leagues
to coordinate efforts to support credit unions and leverage the events and relationships of
one another. Catalyst Corporate’s satellite offices in Georgia and California as well as the
geographically dispersed staff also will support the objective of consistent, high-quality
outreach.
18
Governance
In keeping with its corporate credit union charter, Catalyst Corporate’s Board of Directors
is made up of members – senior officials from member credit unions – who represent the
membership at large. During merger preparations it was necessary to establish a process
that would ensure this objective could be met even though elections would not occur until
the first annual meeting in 2012.
After soliciting the membership of Southwest Bridge Corporate for volunteers, the Member
Advisory Council’s Executive Committee identified a Governance Advisory Council (GAC) to
recommend a slate of candidates for the Board of Directors and Supervisory Committee.
The GAC met several times in early 2010 to contemplate and finalize its recommendation.
Because the Georgia Corporate charter survived the merger, it was necessary for Georgia
Corporate’s Board of Directors to appoint the Catalyst Board. The formal appointments
took place at the first meeting following consolidation, on September 6, 2011, at which time
all but one prior Georgia Corporate director resigned. The remaining director was Board
Chairman Lin Hodges, who now serves as Catalyst Corporate’s Board Chairman. In
accordance with the Bylaws, the corporate’s current Board of Directors will serve until the
next Annual Meeting, at which time the positions will be open for member election.
During this first meeting, the new Catalyst Board of Directors appointed the GACrecommended candidates to the Supervisory Committee. Other committees appointed
included the Asset-Liability Committee and the Technology Steering Committee.
Catalyst Corporate’s nine-member Board of Directors meets the objective of ensuring
broad representation among members, with directors from eight states.
Catalyst Corporate Board of Directors:
Lin Hodges - Chairman
President/CEO
Associated CU
Norcross, GA
Ronald Johnston
President/CEO
Artesia CU
Artesia, NM
Bobbie Threlkeld
President/CEO
Baptist Health FCU
Little Rock, AR
Ayn Talley
President/CEO
Houston Police FCU
Houston, TX
Michael Hooper
President/CEO
La Capitol FCU
Baton Rouge, LA
Rick Hein
President/CEO
OSU FCU
Covallis, OR
Rod Taylor
President/CEO
Barksdale FCU
Bossier City, LA
Connie Cofer
SVP Finance/CFO
Communication FCU
Oklahoma City, OK
19
John Papagano
CFO
Healthcare's Cooperative CU
Jacksonville, FL
Catalyst Corporate’s Supervisory Committee:
Kerry Parker
Candace Bracewell
President/CEO
SVP/CFO
A+ FCU
LGE Community CU
Austin, TX
Marietta, GA
Catalyst Corporate’s ALCO:
Rick Hein
President/CEO
OSU FCU
Covallis, OR
Sonya Jaynes
CFO
Red River EFCU
Texarkana, TX
Syed Dinar
Vice President/CFO
Texas Bay Area CU
Houston, TX
Craig Atkinson
President/CEO
Houston Highway CU
Houston, TX
Tony Budet
President/CEO
University FCU
Austin, TX
Staff Members of ALCO: Dianne Addington, Bruce Fox, Brent Smith, Melissa Wardell
Catalyst Corporate Technology Steering Committee:
Connie Cofer
SVP Finance/CFO
Communication FCU
Oklahoma City, OK
Jim Ladner
SVP/CFO
Resource One CU
Dallas, TX
Arna Reynolds
President/CEO
Amarillo Community FCU
Amarillo, TX
Staff Members of the Technology Steering Committee: Brad Ganey, Brent Smith, Melissa Wardell
Continuing on this path, Catalyst Corporate’s Board of Directors plans to increase its
number from nine to 11 members and appoint a Governance Advisory Committee to
recommend candidates to represent additional western states – particularly executives
from Western Bridge Corporate’s former member credit unions. Appointments will take
place at the first official meeting of the Board of Directors following the targeted June 30,
2012 integration date.
20
Products and Services
General
Catalyst Corporate provides a broad range of wholesale financial products and support
with the intent to maximize convenience and cost-effectiveness for its member credit
unions. Though specific products evolve with environmental changes, offerings are
generally categorized as payment services, correspondent services, settlement
services, investments (including overnight investments, brokered certificates and
marketable securities) and liquidity. Through its wholly-owned subsidiary, Catalyst
Solutions, Catalyst Corporate offers asset-liability management tools and advisory
services. Catalyst Corporate also has an ownership stake in Credit Union Business Group,
which provides a turn-key solution for credit unions that offer business services to their
own members. Product and service offerings are complemented by educational and
training opportunities throughout the year. A complete listing of Catalyst Corporate’s
products and services may be found in Exhibit B.
Catalyst Corporate’s highly efficient business model enabled management to fulfill its
pledge that, despite the aggressive earnings accumulation targets set out by the corporate’s
business plan, members would see no changes in fees for 2012 (other than a very small
number of pass-through charges from third-party partners). Catalyst Corporate is deeply
committed to maintaining its competitive pricing structure and continuously seeks ways to
improve the value and pricing offered to members.
Changes to Investment Accounts
Certain modifications to the investment products traditionally offered by corporate credit
unions were necessary to enable Catalyst Corporate to fulfill new regulatory capital
requirements. These include a ceiling on the balance that a member credit union can keep
in its overnight investment account and the initial elimination of certificates of deposit.
These limitations help to reduce Catalyst Corporate’s balance sheet size, which is
imperative for achieving capital ratio targets.
The cap on the Performance Tiered Account (PTA), which is Catalyst Corporate’s overnight
investment account offering, was set initially at $1 million. Management determined the
cap based on the amount of PCC raised in Catalyst’s first capital offering as well as a delay
in the corporate’s ability to limit non-capitalizing credit unions’ use of the balance sheet
prior to October 20, 2011. Adjusting the cap on the PTA from time to time will serve as the
primary means of managing Catalyst Corporate’s balance sheet size, but will have an
immaterial impact on member credit unions due to the employment of a daily sweep of
21
credit unions’ excess balances into the Federal Reserve’s Excess Balance Account (EBA).
Funds above the cap are swept from the PTA automatically late each day and returned to
the account the following morning.
The EBA is a limited-purpose account established by the Federal Reserve Bank for
maintaining the excess balances of institutions that are eligible to earn interest on balances
held at the Fed. An EBA is managed by an agent (e.g., corporate credit union) on behalf of
the participants (e.g., natural person credit unions that are members of a corporate credit
union). Credit unions are not required to have an account at the Fed to participate in the
EBA program. Balances held in the FRB Excess Balance Account are the liability of the FRB.
In the future, Catalyst is expected to offer “As Agent” Fed Funds and a Money Market Fund
as alternatives for moving excess balances out of the PTA. The “as agent” program will
involve bulk trading of excess credit union liquidity, where overnight transactions are
executed in the name of the credit union rather than the corporate. Fed Funds has
historically been a large and active market with many creditworthy counterparties.
The Money Market Fund will be managed by one or more highly regarded investment
management firms. Each type of excess balance sheet alternative will perform better
during specific phases of the business cycle, ensuring that credit union’s maximize the
interest earned on excess funds.
Lines of Credit
Catalyst Corporate offers each of its capitalizing members a robust line of credit that
exceeds other options in the market place in terms of both the amount and convenience of
use. The amount of the line of credit is calculated using a formula that heavily weights the
credit union’s settlement balances, ensuring that settlement needs will always be met. In
addition to automatic loans used to cover settlement activity, Catalyst Corporate offers a
range of options for maximizing the benefits of the line of credit, and accepts a variety of
collateral types to secure these lines. Catalyst Corporate will also offer fixed and variable
rate term loans.
U.S. Central Products and Services
The disposition of products and services traditionally offered by U.S. Central to corporate
credit unions is not fully known. Catalyst Corporate uses several products and services
provided by either U.S. Central or one of its corporate credit union service organizations
(CUSOs). These services include: 1) cash concentration; 2) foreign check collection and
international drafts; 3) international wires; 4) ACH; 5) auto settlement; 6) bill payment; 7)
brokerage services; and 8) security safekeeping.
22
Industry Activity:
The wholly-owned broker-dealer, Credit Union Investment Solutions, Inc. was
purchased in September by a group of corporate users including Catalyst Corporate. As a
result, member access to this highly-competitive, credit union-focused brokerage firm will
not be interrupted. This CUSO’s name under its new ownership structure is CU Investment
Solutions, LLC.
On the correspondent and payments front, efforts to create a limited-purpose corporate
to acquire certain products such as APEX-ACH and automated settlement did not succeed.
Corporates continue working independently, and occasionally in concert, to devise
solutions for offering these services to their own member credit unions in the future.
Due Diligence on U.S. Central Replacement Options:
Catalyst Corporate has transition plans to alternative payments solutions for all services
previously provided by U.S. Central. The transition timelines allow for the conversion of all
services in less than six months. Minimal impact on member credit unions is expected, and
Catalyst Corporate does not anticipate materially higher costs. Below is a summary of
Catalyst Corporate’s due diligence on alternative service payments products service
providers.
Foreign Check Collection and International Drafts – Approximately 105 credit unions
are currently active in utilizing the foreign check collection services, with fewer than
25 credit unions actively utilizing international draft services. Three alternative
vendors to U.S. Central have been evaluated, resulting in the selection of Travelex.
Catalyst Corporate is actively working with Travelex to transition these services.
International Wires – U.S. dollar (USD) international wires are currently processed
though JP Morgan Chase with the exception of a small number of legacy Northwest
Corporate credit unions and Georgia Corporate credit unions, which use U.S.
Central’s ePD system. These credit unions can be transitioned to the JP Morgan
Chase service, which leverages Catalyst’s existing TranZact system.
Catalyst Corporate is currently working with JP Morgan Chase to transition
processing of all FX international wire activity.
ACH – The majority of credit unions contracting with Catalyst Corporate for ACH
services utilize a combination of ACI, Momentum and internally-developed systems
to accomplish this activity. Catalyst Corporate also supports credit unions that
continue to utilize U.S. Central’s APEX-ACH system. Catalyst Corporate will continue
to support the APEX-ACH solution if it is successfully transitioned to another service
provider, thus providing its member credit unions with a choice of ACH solutions.
23
Catalyst Corporate has extensive experience converting credit unions from APEX
and other systems to its alternative ACH solutions. In the event it becomes
necessary to convert credit unions from U.S. Central’s APEX system, the corporate
would follow its standard implementation procedures.
Auto Settlement –Approximately 960 credit unions currently utilize Catalyst
Corporate’s automated settlement services through U.S. Central. This is
accomplished through U.S. Central’s contractual relationships with the participating
originators who deliver files to x-Roads for processing. Catalyst Corporate receives
auto-settlement files daily from x-Roads.
In the event the U.S. Central service is discontinued, Catalyst Corporate will
establish direct relationships and continue to receive files either through x-Roads or
directly from the originator. Catalyst Corporate has experience with this process as
it has managed a direct relationship with a local financial institution for a number of
years. Catalyst Corporate has the capacity to expand this process and manage all
existing relationships directly; however, the establishment of a direct relationship is
based on each originator’s willingness to work with an individual corporate. If an
originator is not willing to establish a direct relationship, Catalyst Corporate would
work with its member credit unions and the vendor(s) to provide assistance in
transitioning certain activity to an alternate settlement option, which is anticipated
to be ACH.
Bill Payment –Currently, 18 credit unions participate in electronic bill pay with
Catalyst Corporate through Corporate Network eCom, a CUSO owned by U.S. Central.
Catalyst Corporate anticipates that the bill pay products of eCom will continue to be
offered through eCom or its successor through acquisition.
Security Safekeeping – Catalyst Corporate has over 400 credit unions that utilize U.S.
Central’s securities custodial services. . After conducting due diligence on four
potential vendors, Catalyst Corporate has selected Alaska USA Trust Company to
provide this service beginning in January 2012.
Cash Concentration – Currently, 199 Catalyst credit unions utilize the Cash
Concentration/ADT service processed through U.S. Central. In the event U.S. Central
discontinues this service, Catalyst Corporate will work with credit unions to
transition this activity to wires or ACH origination.
24
Capitalization
Introduction
The pre-merger Capital Plan included the issuance of $130 million in PCC—an amount
sufficient to support a balance sheet of $2.6 billion. The financial projections that
accompanied the Strategic Business and Capital Plan included scenarios for collecting more
PCC (up to $180 million) and for collecting less (as low as $100 million). Ultimately,
Catalyst Corporate was recapitalized with $93 million in PCC. Because this amount is less
than what was presented in any of the original Business Plan scenarios, management reevaluated and recast financial projections to reflect a reduction in fee income, a lower level
of overnight balances, and a smaller balance sheet of approximately $2.0 billion. These new
projections, delivered to the memberships of Southwest Bridge Corporate and Georgia
Corporate prior to the merger, also reflected substantial operating expense reductions that
align the organization with the anticipated number of member credit unions, as well as
other updated information. The revised projections demonstrated that changes to the
original plan would not compromise capital compliance, product offerings, service delivery
or pricing.
More recently, the financial projections have been recast once again to account for the
inclusion of Western Bridge members as users of Catalyst Corporate products, as
depositors and as capital contributors. These conservative estimates project an average
balance sheet of $3.0 billion and approximately $157 million in PCC.
For details regarding the financial performance projections for Catalyst Corporate, see the
“Financial Performance” section of this document.
The Capital Plan is designed to maintain sufficient core capital to sustain a leverage ratio
and risk-based capital ratios that exceed the minimum regulatory capital requirements for
a well-capitalized corporate credit union. NCUA defines a well-capitalized corporate credit
union as one that has attained a leverage ratio of 5.00 percent or greater, a total risk-based
capital ratio of 10.00 percent or greater, and a Tier 1 risk-based capital ratio of 6.00
percent or greater.
Catalyst Corporate’s leverage ratio at the end of its first month of operations was 4.75
percent and rose to 5.01 percent as of October 31, 2011 – achieving well capitalized status
ahead of schedule. Plan projections predict an increase to 5.71 percent by 2013, a total
risk-based capital ratio well above 10.00 percent, and a Tier 1 risk-based capital ratio that
is substantially higher than 6.00 percent.
The core capital (i.e., retained earnings and PCC) is expected to increase as retained
earnings grow going forward. In December 2016, the projected leverage ratio is estimated
25
to be 5.28 percent and accumulated retained earnings are projected at 1.63 percent. The
Consolidated Corporate’s tier 2 capital ratio (i.e., retained earnings and total PCC) is
expected to be 6.77 percent in December 2016. Beginning in October 2016, certain
regulatory capital rules will limit the amount of PCC that can be included in the leverage
ratio, resulting in a decline in the leverage ratios in December of 2016. Over time, capital
compliance will be more reliant on retained earnings and less dependent on membercontributed capital.
Catalyst Corporate’s capital formula results in member capital requirements that are
substantially less than what was required by Southwest Corporate and Georgia Corporate
previously, and either less than or approximately equal to the requirement proposed by
United Resources. Southwest Corporate had a 100 basis point requirement with a cap of $1
million, while Georgia Corporate used a range from 30 to 100 basis points with no cap.
Catalyst Corporate ’s membership capital requirement is a maximum of 0.25 percent of
assets and employs a cap to limit the overall contributions of larger credit unions to no
more than $750,000, as well as a scale back provision for credit unions with assets under
$50 million. United Resources also proposed a 25 basis point requirement, but had much
higher caps for larger credit unions (up to $2.5 million) and no small credit union scale
back provisions. More detail about the capital requirement may be found in Section C,
“Issuance of Member Contributed Capital,” below.
The Capital Plan of the Catalyst Corporate includes three primary components. They are:
A. Smaller balance sheet
B. Issuance of member-contributed capital (PCC)
C. Controlling net operating expenses
Catalyst Corporate’s proposed Capital Plan was developed to minimize the level of capital
contributed by member credit unions. The lower proposed member-contributed capital
requirements were structured with a goal of retaining pre-merger member credit unions
and attracting additional credit unions to Catalyst Corporate following consolidation.
A. Smaller Balance Sheet
Transitioning to a smaller balance sheet is a key factor in Catalyst Corporate’s ability to
meet regulatory requirements---a goal that has been achieved. As of November 30, 2010,
the combined assets of Georgia Corporate and Southwest Bridge Corporate (now Catalyst
Corporate) totaled $11.1 billion. The Business Plan updated financial projections include
assets of $2.2 billion in the first month of consolidated operations, moving to $2.0 billion in
2012 as certificates continue to mature; however, Catalyst Corporate reached its $2.0
billion goal as of October 31, 2011. With the addition of Western Bridge Corporate member
26
deposits, assets are expected to approximately $3.5 billion in July 2012, before settling at
$3.0 billion by year end, supported by $172 million in Total Capital.
Catalyst Corporate was able to reduce its balance sheet as a result of several factors. These
are: (i) the corporate’s liquidity position; (ii) the ability to decrease the size of member
term share certificates and overnight share balances; and iii) a sweep service that transfers
excess Performance Tiered Account (PTA) shares (i.e., daily share balances that exceed a
predetermined cap) to the Federal Reserve Bank Excess Balance Account.
Catalyst Corporate will be able to sustain its small balance sheet following the integration
of Western Bridge members, as described below.
Term Investments and Loans
Catalyst Corporate and Western Bridge Corporate’s combined cash and cash equivalents as
of November 2011 were approximately $7.5 billion or 90.0 percent of total assets. The
structure of the corporates’ investment portfolios will provide the necessary flexibility to
reduce the size of the combined balance sheet to approximately $3 billion.
As of November 2011, Catalyst Corporate had approximately $850 million in securities,
member term loans, and term certificates at U.S. Central. Western Bridge assets are
primarily in overnight investments at the Federal Reserve Bank. The combination of this
strong liquidity position and projected cash flows as a result of maturing term investments
will facilitate a reduction in the size of the combined balance sheet sufficient to maintain
compliance with regulatory capital ratios.
Member Credit Union Shares
As of November 2011, the outstanding member term certificates and overnight shares of
Catalyst Corporate and Western Bridge Corporate totaled approximately $8.2 billion. This
total included $500 million in member term certificates and $7.7 billion in overnight
shares. Catalyst Corporate’s Capital Plan includes a significant reduction in member term
certificates and the daily transfer of a significant portion of overnight shares to the Federal
Reserve Bank Excess Balance Account in July 2012.
Sweep Account
Catalyst Corporate introduced a service to transfer excess shares in a member credit
union’s overnight investment account (i.e., PTA) automatically to an off-balance sheet
investment account. This sweep account function limits the amount of deposits a credit
union can hold in its overnight investment account. Excess on-balance sheet overnight
investment shares are transferred on a daily basis to the Federal Reserve Bank Excess
Balance Account. The deposit cap of Catalyst Corporate’s overnight investment account is
27
currently $1 million. The periodic adjustment of this cap amount will be a key tool in
Catalyst Corporate’s ability to maintain a reduced balance sheet size; however, it has
minimal impact on members due to the convenient, automated sweep function.
Off-balance Sheet Investment Options
Catalyst Corporate plans to offer three types of off-balance sheet overnight investment
options. They are:
1. Federal Reserve Bank Excess Balance Account
2. Money Market Funds
3. Fed Funds and Deposit Account Placement
Each of these off-balance sheet products will allow member credit unions to transfer excess
on-balance sheet shares automatically from their PTA and STA on a daily basis. At various
stages of the market cycle, each of these programs program will outperform the others.
Initially, the Federal Reserve’s Excess Balance Account program is the most competitive
and accessible option.
1. Federal Reserve Bank Excess Balance Account
Catalyst Corporate is currently participating in the Federal Reserve System’s Excess
Balance Account (EBA) program. The EBA is a limited-purpose account at the
Federal Reserve Bank established for maintaining the excess balances of financial
institutions (i.e., credit unions) that are eligible to earn interest on balances held at
the Federal Reserve Banks. The EBA permits the corporate to serve as agent when
placing the credit unions’ excess balances at Federal Reserve Banks, following the
completion of appropriate documentation between the corporate, the credit union,
and the Federal Reserve. The balances in the excess balance account are assets of
the credit unions, not Catalyst Corporate; therefore, balances in this account are not
included in the corporate’s regulatory leverage ratio.
Currently, the EBA program is the sole overnight off-balance sheet option for credit
unions that choose to allow Catalyst Corporate to manage these funds on their
behalf, though it is possible to manually transfer funds into and out of the PTA if
desired.
The Federal Reserve Bank’s excess balance account provides credit unions with
access to an off-balance sheet overnight investment option that offers a competitive
interest rate, with no credit or price risk.
2. “2a-7” Money Market Funds
28
Subject to receipt of regulatory approval, Catalyst Corporate will enter into a
revenue sharing agreement with one or more institutional mutual fund facilities to
offer “2a-7” money market funds to its member credit unions. The units of each
money market fund will be limited to fund portfolios that are designed to qualify as
eligible investments (i.e., treasury and agency guaranteed debt) for federally insured
credit unions.
The money market funds are expected to provide credit unions access to an offbalance sheet overnight investment option that will offer competitive interest rates,
with no credit risk and a stable net asset value.
3. Fed Funds and Deposit Account Placement
Catalyst Corporate also plans to offer member credit unions access to the Fed Funds
market. Based on credit union authorization and agreement, the program will assist
credit unions in placing overnight investments (i.e., Fed Funds sold and deposit
accounts) in highly rated large regional and money center banks.
The Fed Funds placement option is expected to provide credit unions access to an
off-balance sheet overnight investment option that will offer competitive interest
rates, with minimal credit and price risk.
Figure A (in thousands) contains the Consolidated Corporate’s projected average member
credit union share balances from July 2012 through December 2012. Catalyst Corporate
was approved as an agent for the Federal Reserve Bank Excess Balance Account program in
September 2011.
July 2012
Aug 2012
Sept 2012
Oct 2012
Nov 2012
Dec 2012
Cash Management
PTA/STA
$ 2,600,000
$
700,000
$ 2,400,000
$ 700,000
$ 2,200,000
$ 700,000
$ 2,100,000
$ 800,000
$ 2,000,000
$ 900,000
$ 2,000,000
$ 900,000
Total DANA
$ 3,425,000
$ 3,215,000
$ 3,000,000
$ 2,990,000
$ 2,985,000
$ 2,980,000
Certificates
$
125,000
$
115,000
$
100,000
Figure A
$
90,000
$
85,000
$
80,000
B. Perpetual Contributed Capital (PCC) Issuance
In accordance with its Capital Plan, Catalyst Corporate’s issued PCC as a means of raising
tier one capital sufficient to meant the NCUA’s initial regulatory targets. The membercontributed capital formula was designed to maximize participation in the capital offering
among existing member credit unions initially, and to attract other credit unions to Catalyst
Corporate in the future. The capital formula incorporated feedback from member credit
29
unions that expressed a desire for a lower member-contributed capital requirement and a
more proportional dollar requirement based on a credit union’s asset size.
Capital Formula
Catalyst Corporate’s membership perpetual contributed capital requirement is 0.25
percent of a credit union’s total assets as reported on its most recent year-end NCUA call
report. The member-contributed capital requirement has two caps that limit the dollar
amount of contributed capital for larger credit unions. A $600,000 cap for credit unions
with $240 million to $750 million in assets and a $750,000 cap for credit unions with total
assets greater than $750 million. Additionally, the member-contributed capital
requirement includes a proportional threshold for credit unions with less than $50 million
in assets. As an example, the membership requirement for a credit union with assets of $25
million would be 0.125 percent of assets or $31,250. The minimum member-contributed
capital requirement is $500.
The PCC is expected to pay a variable rate of interest based on the one-month LIBOR rate
plus a margin of 0.50 percent. Dividends paid on PCC are subject to Catalyst Corporate
meeting the minimum retained earnings requirements of NCUA’s final rule, with which the
corporate is currently in compliance. The interest rate paid on PCC will reset each month
and accrued interest on the PCC will be paid quarterly.
A member is required to subscribe to PCC in order to access the on-balance sheet products
and services of Catalyst Corporate; however, PCC is not required to utilize certain offbalance sheet services provided by the corporate or to utilize services provided by a CUSO
owned by the corporate. Such off-balance sheet services include: i) investment advisory; ii)
asset/liability management reporting; iii) broker/dealer; iv) insured certificate placement
and custody (SimpliCD); and v) business lending services (Credit Union Business Group,
LLC).
Private Placement Memorandum
Catalyst Corporate makes available to potential subscribers a detailed Private Placement
Memorandum for PCC. This document provides details about the subscription process.
C. Controlling Net Operating Expenses
Catalyst Corporate’s business model was developed with the objective of building retained
earnings by tightly controlling future operating expenses. This conservative approach
began with an organization-wide review and assessment of the operating expense
structure of the merging corporate credit unions. The process included a comprehensive
review of current expenses and future costs in all functional areas. Management was able
30
to identify meaningful opportunities to reduce costs without reductions in product
offerings or service levels.
In the ongoing pursuit of this objective to build retained earnings, all Western Bridge
existing products and services will be consolidated into Catalyst Corporate’s existing
operations, systems, processes, account structures, and front-end systems (though Catalyst
Corporate will maintain an office in California, primarily staffed with member facing
personnel).
In addition to consolidation, other strategic and operating changes will influence future
expense reductions, such as: (i) maximizing operating efficiencies and managing selfsufficient product lines; (ii) maintaining a smaller and lower risk investment portfolio; and
(iii) anticipating a smaller earning asset base.
In total, Catalyst Corporate’s net operating expenses are projected to decline by $36.0
million in 2012 when compared to its predecessors’ (Southwest, Georgia and Western
Bridge) combined 2010 net operating expenses. The projected reduction in net operating
expenses will result in maximized efficiencies and growth in undivided earnings.
Catalyst Corporate’s operating philosophy will continue to center on maintaining a cost
efficient operation. One such measure that validates this commitment is Catalyst’s low net
operating expense. Net operating expense is calculated by subtracting fee income from
total operating expenses. Since 2007, net operating expenses of Catalyst Corporate’s
predecessor corporates have declined $59.5 million (84.00 percent) to a forecast of $11.6
million in 2012. Additional planned decreases in net operating expenses are projected in
2011 and 2012 before leveling off at approximately $5 million.
The corporate’s historical and projected net operating expenses are illustrated in Figure B.
31
Net Operating Expense (NOE)
$80,000,000
$70,000,000
$60,000,000
$50,000,000
$40,000,000
$30,000,000
$20,000,000
$10,000,000
$0
2004
2005
2006
2007
2008
2009
2010
2011
2012
Catalyst Corporate & Western Bridge - NOE (Actual)
Western Bidge - NOE (Actual)
Catalyst Corporate - NOE (Actual)
Catalyst Corporate (Forecast)
2013
2014
2015
Figure B
As indicated, net operating expenses of Catalyst Corporate are projected to remain below
levels experienced in 2004.
Catalyst Corporate’s projected performance in managing net and total operating expenses
is a result of: i) minimal growth in compensation through continued efficiencies gained
from item processing; ii) efficiencies gained from the consolidation of three corporate
credit unions; and iii) fee income growth from off-balance sheet investment transactions.
D. Summary
Catalyst Corporate’s Capital Plan builds on the successful achievement of previously
established objectives including a capital raise of approximately $96 million (as of
November 2011) in PCC, operational consolidation of Southwest Bridge Corporate and
Georgia Corporate, balance sheet reduction to $2.0 billion through implementation of the
Federal Reserve’s EBA, and reduction in operating expenses---steps that were implemented
successfully in 2011. The updated plan encompasses five primary components. They are:
•
•
•
•
•
Issuing $62 million in new PCC to Western Bridge members
Consolidating the existing operations of Catalyst Corporate and Western Bridge
Corporate to improve operating efficiencies
Maintaining a $3 billion balance sheet
Pursuing a renewed focus on fee income derived from payment services and offbalance sheet investment services
Controlling net operating expenses
All of these objectives have been accomplished or are underway. This success underscores
management’s belief that the proposed Capital Plan is prudent and realistic given the
challenging economic and operating environment anticipated in 2012 and beyond. The
32
plan was designed with the objective of managing through such a challenging operating
environment while continuing to serve the needs of the members and achieving earnings
and capital goals.
33
Business Plan Status
In the short period of time since the distribution of the Strategic Business and Capital Plan
in March 2011, many of the objectives of the plan issued earlier in the year have been met.
Others are well underway.
1) Consolidation of Southwest Bridge Corporate and Georgia Corporate operations
The financial and operational consolidation of the two corporates was
consummated successfully on September 6, 2011.
2) Formation of a scalable, low-cost provider of products and services strategically
positioned to increase product and service volumes
The organization as described was formed effectively with the merger on
September. The corresponding reduction in force reflects the scalability of the
model. In the first month of operations, Catalyst Corporate’s earnings were
$637,851 vs. the $77,106 that was budgeted, and the coverage ratio was in excess of
100%. (This performance was an anomaly due to unforeseen one-time events). The
coverage ratio for the first two months of operations averaged 96 percent versus a
projection of 83.2 percent, and return on assets was .28 percent compared to the
forecast of .07 percent. Further, member pricing for 2012 was announced and, as
predicted, no price increases (other than third party partner pass-throughs) were
included.
3) Creation of a smaller balance sheet and lower member-contributed capital
requirements
Catalyst Corporate launched successfully on September 6, 2011 with $93 million in
contributed capital, which reflected the substantially lower capital requirements
communicated in the PPM. The balance sheet was effectively reduced with the
implementation of sweep functionality and use of the Federal Reserve’s EBA
program. In the first month of operations, Catalyst Corporate’s DANA was: $2.19
billion v. the $2.22 billion in the Business Plan.
4) Limited deposit access to overnight investment accounts
The Federal Reserve’s EBA program was implemented successfully just prior to the
merger date and has achieved the objective of dramatically reducing the size of
Catalyst Corporate’s balance sheet while ensuring members continue to enjoy onestop access for their investible funds.
34
5) Restricted issuance of share certificates
Since the dissemination of the original Strategic Business and Capital Plan, share
certificate balances have decreased from $1.6 billion to $450 million as certificates
have matured.
6) Potential transition from U.S. Central products and services
CU Investment Services, LLC was formed and capitalized by a group of corporate
credit unions, including Catalyst Corporate, ensuring that member credit unions will
continue to have access to this competitive, credit union-focused broker-dealer.
While U.S. Central’s payment products and services remain fully accessible at
present, Catalyst Corporate has performed extensive due diligence on alternatives
and is poised to offer an alternative for 100% of the current U.S. Central product
line.
7) Issuance of member-contributed capital (PCC)
Catalyst Corporate launched with $93 million in member-contributed PCC, which is
deemed sufficient to support its $2.0 billion balance sheet and reflects a 77 percent
recapitalization rate. Catalyst Corporate anticipates reaching at least $156.7 million
in PCC by June 30, 2012.
Looking ahead:
The Board of Directors of Catalyst Corporate was seated on September 6, 2011. Among its
many accomplishments, the Board has achieved numerous plan objectives including
appointing committees, purchasing the Catalyst Corporate headquarters from the asset
management estate, and hiring a search firm to identify a new president/chief executive
officer. This new chief executive is expected to be in place by early 2012. Catalyst has also
developed a new PPM for PCC and is actively engaging with credit unions that are seeking
alternatives to their previous service providers, including corporates whose efforts to
recapitalize were unsuccessful.
In 2012, Catalyst Corporate will focus on i) deepening relationships and market share with
existing members, and will actively seek member engagement through Catalyst Councils
and other outreach activities and ii) successful integration of Western Bridge Corporate’s
member credit unions concurrent with a successful capital offering. The time line for this
integration is as follows:
35
o January 2012: Town Hall Meetings will take place throughout states with large
concentrations of Western Bridge Corporate member credit unions, including
California, Nevada, Washington, Oregon and Hawaii.
o January 2012: Western Bridge Corporate member credit unions will receive a
Private Placement Memorandum for Perpetual Contributed Capital along with
abundant support materials.
o March 31, 2012: Capital commitments are due to Catalyst Corporate.
o March-April 2012: Catalyst Corporate will work with credit unions to prepare
documentation for establishing Excess Balance Account relationships with the
Federal Reserve.
o June 30: All transitions are slated to be complete with full operational integration.
36
Financial Performance
Model Balance Sheet (Investment Portfolio with Normal Interest Rates)
A model portfolio was created to calculate net interest income to use in the financial
projections presented in this Strategic Business and Capital Plan. The model portfolio
presents an illustration of a potential asset allocation of Catalyst Corporate. The model
represents a more liquid, lower risk balance sheet that should reduce member-contributed
capital’s exposure to systemic risk.
Exhibit C contains an illustration of a model balance sheet for Catalyst Corporate that is in
compliance with the final NCUA Rules and Regulations Part 704. The asset allocation is
structured so that it is in compliance with the investment, ALM, and liquidity provisions of
Part 704. Characteristics of the asset allocation that results from such compliance are as
follows:
•
•
•
•
•
•
All assets have a NRSRO rating of AA or better.
No prohibited securities are in the portfolio.
All sector allocations are met.
All interest rate risk NEV tests are satisfied.
The portfolio has a weighted-average life (WAL) of 1.32 years, which is below the
2.0 year limit in Part 704.
The portfolio’s WAL extends to 1.55 years, well below the 2.25 year limit required
by Part 704.
The model portfolio assets are allocated across seven discrete asset classes: i) member
loans; ii) automobile asset-backed securities (ABS); iii) credit card ABS; iv) FFELP student
loan ABS; v) agency mortgage-backed securities; vi) corporate debt obligations; and vii)
agency debt. No single non-agency investment asset sector comprises more than 8 percent
of assets.
The model portfolio includes 41.00 percent in short-term overnight investments. The
projected rate on interest earned on overnight investments is Effective Fed Funds minus 2
basis points or one-month LIBOR minus 12 basis points. The model portfolio’s overnight
investments are held in excess reserves at a Federal Reserve Bank. Currently, the rate of
interest paid on excess reserves is 25 basis points. At some point in the future, it is likely
that the Federal Reserve Bank will discontinue paying an interest rate on excess reserves.
Catalyst Corporate’s plan will be to reallocate its overnight investments to other short-term
money market instruments. These money market instruments may include: i) repurchase
agreements; ii) bank money market savings accounts (bank deposits); iii) Treasury and
agency money market funds; iv) Fed Funds sold; and v) commercial paper.
37
All of the liabilities of the model portfolio are allocated to overnight shares. Initially,
Catalyst Corporate is not expected to offer term certificates to its members because of the
need to closely manage its assets and achieve the three capital requirements of Part 704.
All existing member certificate balances are in a run-off mode.
The model portfolio’s pricing of overnight shares (i.e., Cash Management and PTA) is
consistent with the share pricing procedures used by Catalyst Corporate and its
predecessors since 2006.
The model portfolio uses current spread over LIBOR (as of December 17, 2010) for each
asset class with the exception of member loans. The source for spread over LIBOR for the
five securities asset classes was J.P. Morgan Securities LLC. The spread over LIBOR for
member loans represents historical loan pricing guidelines used by Catalyst Corporate and
its predecessors.
The model portfolio’s net interest income (NII) was calculated using two distinct interest
rate scenarios including a low interest rate environment (i.e., 25 basis point Fed Funds)
and a more normal rate environment (i.e., > 125 basis point Fed Funds). The distinction
between the two interest rate scenarios is significant and results in a material difference in
the NII generated in the model portfolio. As an example, the projected NII in the low
interest rate scenario is approximately 26 basis points compared to a NII of approximately
55 basis points for the model portfolio in a normal interest rate scenario.
38
Financial Projections
The base case scenario Exhibit D represents Catalyst Corporate’s projections of the most
likely future financial results. The base case scenario includes total PCC of $158 million and
$3.0 billion in DANA.
Two key assumptions in the base case scenario include the future change in the Fed Funds
rate and the expected retention rate of Western Bridge members. The base case scenario
assumes that future changes in the Fed Funds rate are based upon current market
consensus (i.e., Fed Funds futures). Currently Fed Funds are expected to remain at 25 basis
points until December 2013. The future level of Fed Funds is the most relevant determinant
of Catalyst Corporate’s future net interest income.
The base case scenario includes an assumption related to the number of Western Bridge
members that will capitalize and continue to use Catalyst Corporate payment services.
Specifically, the base case scenario assumes the 80 percent of Western Bridge members
that subscribed to United Resources’ capital offering will capitalize and retain payment and
correspondent services with Catalyst Corporate. The base case scenario also assumes that
an additional 10 percent of Western Bridge members that did not subscribe to United
Resources’ capital offering will purchase PCC with Catalyst Corporate. In total, Catalyst
Corporate’s base case scenario includes $62 million in new PCC from Western Bridge
members.
Net income is projected to vary from approximately $6.0 million to $11.0 million over the
nine-year period (2012–2020), with a Return on Assets (ROA) ranging from 19 basis points
to 37 basis points. Projected net income (ROA) in 2012 and 2013 is 20 basis points and 19
basis points, respectively. The net income projections are a result of lower projected net
interest income as a consequence of low short-term interest rates.
The year-end leverage ratio and retained earnings are projected to increase significantly
from 2012 to 2020 based on a $3.0 billion balance sheet. At year-end 2012, Catalyst
Corporate’s leverage ratio and retained earnings ratio are projected to be 5.61 percent and
0.36 percent, respectively. At Year-end 2013, Catalyst Corporate’s projected leverage ratio
is 5.71 percent and its accumulated retained earnings are 0.55 percent. Catalyst
Corporate’s Tier 1 and total risk-based capital ratios are expected to significantly exceed
6.00 percent and 10.00 percent, respectively. Under NCUA Rules and Regulations Part 704,
a corporate credit union with a leverage ratio that exceeds 5.00 percent is considered well
capitalized. The 55 basis points of retained earnings exceed the regulatory target of 45
basis points in 2013.
39
Catalyst Corporate’s base case financial projections include a leverage ratio of 5.28 percent
in 2016 and 6.26 percent in 2020, and accumulated retained earnings of 163 basis points in
2016 and 311 basis points in 2020.
Catalyst Corporate’s core capital ratio (i.e., retained earnings and PCC) is projected to be
6.77 percent in 2016 and 8.25 percent in 2020. Fee income is projected to remain relatively
flat over a 9-year period due to a number of factors. These factors include continued
growth in off-balance sheet fee income from investment advisory, securities brokerage, and
SimpliCD. Off-balance sheet fee income is projected to increase at an average annual rate of
3.50 percent from 2012 through 2020. Fee income growth from off-balance sheet services
is offset by continued industry-wide reduction in check volumes and related fee income.
Fee income from payment and correspondent services is projected to decline at an average
annual rate of 1.50 percent from 2012 through 2020.
40
Exhibit A
Catalyst Corporate’s Organizational Chart
41
Exhibit B
Catalyst Corporate’s
Products and Services
CARD SERVICES
ATM Card Program
ATM Terminal Driving
CO-OP ATM Network Access
Debit Card Program
Merchant Card Services
LENDING SERVICES
CLF Loan
Letters of Credit
Lines of Credit
Reverse Repurchase Transactions
Term Loans
COMMUNICATIONS
Electronic and print newsletters
Economic News
Investment Updates
Product and Operational training
PAYMENT SERVICES
ACH Contingency Services
ACH Origination
ACH Receipt
ATM Capture
Automated Settlement
Bill Pay
Branch & Teller Capture
Business ACH Origination
Business Capture
Cash Concentration & Auto Transfer
Corporate Share Drafts
Explicit Float
Fraud Protection – The DEPOSIT CHEK®
Image Deposit Returns
Imaged Share Draft Processing
International ACH
Lockbox Processing
Member Capture
Mobile Capture
TranZact (Online account manager)
Western Union
Wire Transfer
CORRESPONDENT SERVICES
Domestic Collections
International Check Collection
International Currency Service
International Drafts
Reg. D Reserve Funding
INVESTMENT SERVICES
Advisory Services
ALM Services
Brokerage
Cash Management Fund
Performance Tiered Account
Perpetual Contributed Capital Account
Security Safekeeping
SimpliCD Program
42
Exhibit C
Catalyst Corporate’s Model Balance Sheet
Asset Average Life
1.32
Net Interest Income (bps)
54.7
43
Exhibit D
Catalyst Corporate’s Financial Projections
Daily Average Net Assets
MCS- on notice (unamortized)
Perpetual Contributed Capital
Retained Earnings
Total Tier 2 Capital
Net Interest Income
Net Fee Income Payment/Correspondent
Fee Income - Off Balance Sheet
Operating Expense
Net Income
Net Operating Expense
Net Interest Margin
Coverage Ratio
Return on Assets
Retained Earnings Ratio
Leverage Ratio
Total Tier 2 Capital Ratio
2012
2013
2014
2015
2016
2020
$ 3,008,774
3,662
157,744
10,866
172,272
$ 3,000,000
157,744
16,500
174,244
$ 3,000,000
157,744
27,348
185,092
$ 3,000,000
157,744
37,719
195,463
$ 3,000,000
157,744
48,758
206,502
$ 3,000,000
157,744
93,338
251,082
$
$
$
9,873
19,983
6,452
30,332
5,975
$
$
3,898 $
0.33%
87%
0.20%
0.36%
5.61%
5.61%
10,500
20,344
7,317
32,528
5,634
$
$
4,866 $
0.35%
85%
0.19%
0.55%
5.71%
5.69%
18,000
18,766
7,492
33,410
10,848
$
$
7,152 $
0.60%
79%
0.36%
0.91%
6.07%
6.05%
18,000
18,551
7,492
33,672
10,371
$
$
7,629 $
0.60%
77%
0.35%
1.26%
6.42%
6.40%
18,300
18,394
7,998
33,653
11,039
$
$
7,261 $
0.61%
78%
0.37%
1.63%
5.28%
6.77%
18,600
17,664
8,695
33,900
11,059
7,541
0.62%
78%
0.37%
3.11%
6.26%
8.25%
Notes:
1) Financial projections are based on a calendar year and assume a Purchase & Assumption date of June 30, 2012 for
Western Bridge operations. Revenue and expenses related to servicing Western Bridge members begin in July 2012.
2) Base-case projections assume that 80% of the credit unions that originally agreed to purchase PCC from United
Resources and 10% of the remaining credit unions that did not agree to capitalize United Resources will capitalize Catalyst.
This results in 284 credit union members and $62 million in additional PCC. This would increase Catalyst capitalized credit
union members from 865 to 1,149.
3) Base case projections assume 42 FTEs added to support Western Bridge operations. Approximately 12 will be located in
California/Hawaii for member facing needs and the remaining will be located in Plano for back-office operations. Western
Bridge staff will have the opportunity to apply for all open positions at Catalyst Corporate.
4) Catalyst Corporate will implement the EBA program from Western Bridge members to ensure excess balances are swept
into the EBA program to maintain well capitalized status.
5) Base case projections assume Fed Funds rate remain flat throughout 2013. This results in a more conservative forecast
than the original business plan.
6) Catalyst Corporate is projected to be a well-capitalized corporate with a leverage ratio over 5% at all periods. Catalyst
corporate will also meet regulatory retained earnings hurdles in 2013, 2016 and 2020.
44