Regulatory Capital Requirements and Ratios
Capital
Conservation
Buffer Total
2017 Regulatory
Minimums Risk-adjusted:
Common equity tier 1 ratio
Tier 1 capital ratio
Total capital ratio
Permanent capital ratio 18.2%
18.2%
18.6%
18.3% 4.5%
6.0%
8.0%
7.0% 2.5%*
2.5%*
2.5%*
N/A 7.0%
8.5%
10.5%
7.0%
Non-risk-adjusted:
Tier 1 leverage ratio
Unallocated retained earnings and equivalents leverage ratio 19.1%
19.6% 4.0%
1.5% 1.0%
N/A 5.0%
1.5%
As of December 31
*The 2.5% capital conservation buffer over risk-adjusted ratio minimums will be phased in over three years under the FCA capital
requirements.
Our capital plan is designed to maintain an adequate amount of surplus and allowance for loan losses which represents our reserve for adversity prior to
impairment of stock. We manage our capital to allow us to meet member needs and protect member interests, both now and in the future.
Additional discussion of these regulatory ratios is included in Note 7 to the accompanying Consolidated Financial Statements.
In addition to these regulatory requirements, we establish an optimum total capital target. This target allows us to maintain a capital base adequate for future
growth and investment in new products and services. The target is subject to revision as circumstances change. As of December 31, 2017, our optimum total
capital target was to remain above 13.5%, as defined in our 2018 capital plan.
Capital ratios are directly impacted by changes in capital, assets, and off-balance sheet commitments. Refer to the Loan Portfolio and Other Investment
sections for further discussion of the changes in assets. Additional members’ equity information is included in Note 7 to the accompanying Consolidated
Financial Statements. Refer to Note 6 in our Annual Report for the year ended December 31, 2016, for a more complete description of the ratios effective as
of December 31, 2016 and 2015. We were in compliance with the minimum required capital ratios as of December 31, 2016, and 2015.
If the capital ratios fall below the total requirements, including the buffer amounts, capital distributions (equity redemptions, dividends, and patronage) and
discretionary senior executive bonuses are restricted or prohibited without prior FCA approval.
RELATIONSHIP WITH AGRIBANK
Borrowing
We borrow from AgriBank to fund our lending operations in accordance with the Farm Credit Act. Approval from AgriBank is required for us to borrow
elsewhere. A General Financing Agreement (GFA), as discussed in Note 6 to the accompanying Consolidated Financial Statements, governs this lending
relationship.
The components of cost of funds under the GFA include:
A marginal cost of debt component
A spread component, which includes cost of servicing, cost of liquidity, and bank profit
A risk premium component, if applicable
In the periods presented, we were not subject to the risk premium component. Certain factors may impact our cost of funds, which primarily include market
interest rate changes impacting marginal cost of debt as well as changes to pricing methodologies impacting the spread components described above.
The marginal cost of debt approach simulates matching the cost of underlying debt with similar terms as the anticipated terms of our loans to borrowers. This
approach substantially protects us from market interest rate risk. We may occasionally engage in funding strategies that result in limited interest rate risk with
approval by AgriBank’s Asset Liability Committee.
Investment
We are required to invest in AgriBank capital stock as a condition of borrowing. This investment may be in the form of purchased stock or stock representing
distributed AgriBank surplus. As of December 31, 2017, we were required by AgriBank to maintain an investment equal to 2.25% of the average quarterly
balance of our note payable, with an additional amount required on association growth in excess of a targeted growth rate, if the District is also growing
above a targeted growth rate.
We are also required to hold AgriBank stock related to our participation in the AgriBank Asset Pool Program. As of December 31, 2017, we were
required to hold the greater of 8.0% of the quarter-end balance in the program, or 2.0% of the initial balance of loans sold into the program.
At December 31, 2017, our investment in AgriBank was $79.1 million, of which, $47.3 million consisted of stock representing distributed AgriBank surplus
and $31.8 million consisted of purchased investment. For the periods presented in this report, we have received no dividend income on this stock investment
and we do not antici