Annual Report 2018 - Page 31

NOTE 5: OTHER INVESTMENTS We and other Farm Credit Institutions are among the limited partners for Rural Business Investment Companies (RBICs). Our total commitment is $8.0 million, with varying commitment end dates through November 2023. Certain commitments may have an option to extend under certain circumstances. Our investments in the RBICs totaled $555 thousand and $180 thousand at December 31, 2018, and 2017, respectively. The investments were evaluated for impairment. For the years ended December 31, 2018, and 2017, we have not recognized any impairment on these investments. NOTE 6: NOTE PAYABLE TO AGRIBANK Our note payable to AgriBank represents borrowings, in the form of a line of credit, to fund our loan portfolio. The line of credit is governed by a GFA and our assets serve as collateral. Note Payable Information (dollars in thousands) As of December 31 Line of credit Outstanding principal under the line of credit Interest rate 2018 2017 2016 $3,500,000 3,330,133 2.7% $3,500,000 3,131,564 2.2% $3,350,000 3,017,069 1.9% Our note payable was renegotiated effective January 1, 2019, for $4.1 billion with a maturity date of December 31, 2021. 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. Additionally, we have requirements to maintain an effective program of internal controls over financial reporting. At December 31, 2018, 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 non-stockholder 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 Conservation Buffer Total 2018 2017 Regulatory Minimums Risk-adjusted: Common equity tier 1 ratio Tier 1 capital ratio Total capital ratio Permanent capital ratio 18.4% 18.4% 18.8% 18.5% 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 19.3% 19.9% 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 is being phased in over three years under the FCA capital requirements. The phase in period ends on December 31, 2019. Effective January 1, 2017, the regulatory capital requirements for Farm Credit System banks and associations were modified. These regulations replaced existing core surplus and total surplus ratios with common equity tier 1, tier 1 capital, and total capital risk-based capital ratios. These 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 these regulations. 28