Our note payable matures December 31 , 2019 , at which time the note will be renegotiated .
The GFA provides for limitations on our ability to borrow funds based on specified factors or formulas relating primarily to outstanding balances , credit quality , and financial condition . At December 31 , 2017 , and throughout the year , we were not declared in default under any GFA covenants or provisions .
NOTE 7 : MEMBERS ’ EQUITY
Capitalization Requirements
In accordance with the Farm Credit Act , each borrower is required to invest in us as a condition of obtaining a loan . As authorized by the Agricultural Credit Act and our capital bylaws , the Board of Directors has adopted a capital plan that establishes a stock purchase requirement for obtaining a loan of 2.0 % of the customer ’ s total loan ( s ) or one thousand dollars , whichever is less . The purchase of one participation certificate is required of all customers of all nonstockholder customers who purchase financial services . The Board of Directors may increase the amount of required investment to the extent authorized in the capital bylaws . The borrower acquires ownership of the capital stock at the time the loan or lease is made . Typically the aggregate par value of the stock is added to the principal amount of the related obligation . We retain a first lien on the stock or participation certificates owned by customers .
Protection Mechanisms
Under the Farm Credit Act , certain borrower equity is protected . We are required to retire protected borrower equity at par or stated value regardless of its book value . Protected borrower equity includes capital stock and participation certificates that were outstanding as of January 6 , 1988 , or were issued prior to October 6 , 1988 as a requirement for obtaining a loan . If we were to be unable to retire protected borrower equity at par value or stated value , the FCSIC would provide the amounts needed to retire this equity .
Regulatory Capitalization Requirements
Regulatory Capital Requirements and Ratios Capital
|
|
Regulatory |
Conservation |
|
As of December 31 |
2017 |
Minimums |
Buffer |
Total |
Risk-adjusted : Common equity tier 1 ratio 18.2 % 4.5 % 2.5 %* 7.0 % Tier 1 capital ratio 18.2 % 6.0 % 2.5 %* 8.5 % Total capital ratio 18.6 % 8.0 % 2.5 %* 10.5 % Permanent capital ratio 18.3 % 7.0 % N / A 7.0 %
Non-risk-adjusted : Tier 1 leverage ratio 19.1 % 4.0 % 1.0 % 5.0 % Unallocated retained earnings and equivalents leverage ratio 19.6 % 1.5 % N / A 1.5 %
* The 2.5 % capital conservation buffer over risk-adjusted ratio minimums will be phased in over three years under the FCA capital requirements .
Effective January 1 , 2017 , the regulatory capital requirements for Farm Credit System banks and associations were modified . The new regulations replaced existing core surplus and total surplus ratios with common equity tier 1 , tier 1 capital , and total capital risk-based capital ratios . The new regulations also added a tier 1 leverage ratio and an unallocated retained earnings and equivalents ( UREE ) leverage ratio . The permanent capital ratio continues to remain in effect , with some modifications , to align with the new regulations .
Risk-adjusted assets have been defined by the FCA Regulations as the Statement of Condition assets and off-balance-sheet commitments adjusted by various percentages , depending on the level of risk inherent in the various types of assets . The primary changes , which generally have the impact of increasing riskadjusted assets ( decreasing risk-based regulatory capital ratios ) were as follows :
� �
Inclusion of off-balance-sheet commitments with terms at origination of less than 14 months Increased risk-weighting of most loans 90 days past due or in nonaccrual status
Risk-adjusted assets is calculated differently for the permanent capital ratio ( referred herein as PCR risk-adjusted assets ) compared to the other risk-based capital ratios . The primary difference is the inclusion of the allowance for loan losses as a deduction to risk-adjusted assets for the permanent capital ratio . These ratios are based on a three-month average daily balance in accordance with FCA Regulations and are calculated as follows ( not all items below may be applicable to our Association ):
� Common equity tier 1 ratio is statutory minimum purchased member stock , other required member stock held for a minimum of 7 years , allocated equities held for a minimum of 7 years or not subject to retirement , unallocated retained earnings as regulatorily prescribed , paid-in capital , less certain regulatory required deductions including the amount of allocated investments in other System institutions , and the amount of purchased investments in other System institutions under the corresponding deduction approach , divided by average risk-adjusted assets . � Tier 1 capital ratio is common equity tier 1 plus non-cumulative perpetual preferred stock , divided by average risk-adjusted assets . � Total capital is tier 1 capital plus other required member stock held for a minimum of 5 years , allocated equities held for a minimum of 5 years , subordinated debt , and limited-life preferred stock greater than 5 years to maturity at issuance subject to certain limitations , allowance for loan losses and reserve for credit losses subject to certain limitations , less certain investments in other System institutions under the corresponding deduction approach , divided by average risk-adjusted assets .
� Permanent capital ratio is all at-risk borrower stock , any allocated excess stock , unallocated retained earnings as regulatorily prescribed , paid-in capital , subordinated debt , and preferred stock subject to certain limitations , less certain allocated and purchased investments in other System institutions divided by PCR risk-adjusted assets .
� Tier 1 leverage ratio is tier 1 capital , including regulatory deductions , divided by average assets less regulatory deductions subject to tier 1 capital .
30