Annual Report - CoBank

In August 2009, we exchanged $136.8 million of Series Apreferred stock for Series D preferred stock. The exchangewas completed to enhance the quality and durability of ourcapital. For regulatory capital purposes, our Series D preferredstock is included in permanent capital, total surplus and coresurplus, whereas our Series A preferred stock is included onlyin permanent capital and total surplus. In connection with theexchange, holders of the Series A preferred stock voted toeliminate certain restrictions on our ability to make openmarket purchases or exchanges of the Series A preferredstock.In August 2011, we amended the certificates ofdesignation of our Series C and Series D preferred stock torank on parity with Series A and Series B preferred stock as todividend distributions or distributions upon liquidation. Ourpreferred stock is discussed in Note 7 to the accompanyingconsolidated financial statements.At December 31, 2011, we had $1.0 billion insubordinated debt outstanding. For regulatory capitalpurposes, subject to certain limitations, subordinated debt isincluded in permanent capital and total surplus and excludedfrom liabilities in the net collateral ratio. Our subordinateddebt is discussed in Note 6 to the accompanying consolidatedfinancial statements.We may from time to time seek to retire our outstandingdebt or equity securities through calls, cash purchases and/orexchanges, in open market purchases, privately negotiatedtransactions or otherwise. Such repurchases or exchanges, ifany, will depend on prevailing market conditions, the Bank’scapital position and liquidity requirements, contractualrestrictions and other factors. The amounts involved may bematerial.FCA regulations include requirements to maintainregulatory capital at or above minimum levels for ourpermanent capital ratio, total surplus ratio, core surplus ratio,and net collateral ratio. The calculation of these ratios issummarized in Note 7 to the accompanying consolidatedfinancial statements. If these standards are not met, the FCAcould impose restrictions, including limiting our ability to paypatronage distributions, retire equities and pay preferred stockdividends. As displayed in the following table, atDecember 31, 2011, 2010 and 2009, we exceeded theminimum regulatory requirements, which are notedparenthetically.Selected Capital Information ($ in Millions)December 31,2011 2010 2009Total Shareholders’ Equity $ 4,896 $ 4,406 $ 4,058Total Shareholders’ Equity/Total Assets 7.74 % 6.69 % 6.98 %Permanent Capital Ratio (7.0%) 16.37 14.30 15.29Total Surplus Ratio (7.0%) 16.01 13.96 15.01Core Surplus Ratio (3.5%) 10.02 8.42 8.77Net Collateral Ratio (104.0%) (1)(2) 109.05 108.03 108.67(1)The regulatory minimum net collateral ratio is 103.0 percent, but the FCArequires the higher 104.0 percent during the period in which we have Series Apreferred stock or subordinated debt outstanding.(2) As a condition of the merger with AgBank, from January 1, 2012 throughDecember 31, 2014, if the net collateral ratio falls below 105.0 percent, the Bankmust notify the FCA and submit to them a written plan to restore and maintaina level of at least 105.0 percent.Pursuant to FCA guidance, effective July 1, 2011, webegan phasing out our Series A preferred stock($163.3 million at December 31, 2011) from our permanentcapital, total surplus and net collateral amounts at a rate of20 percent per annum. The impact to our regulatory capitaland collateral ratios was less than 0.1 percent during 2011.Also pursuant to FCA guidance, a significant portion ofour common stock is included in core surplus, subject tocertain conditions. This inclusion will continue on a temporarybasis until the earlier of December 31, 2012 or the point atwhich the FCA changes its capital regulations in a manner thatwould be inconsistent with this treatment. The FCA requiresthat we also calculate our core surplus ratio excludingcommon stock and has established a 3.0 percent minimum forsuch ratio. As of December 31, 2011, our core surplus ratioexcluding common stock was 7.91 percent. As a condition ofthe merger with AgBank, from January 1, 2012 throughDecember 31, 2014, if our core surplus ratio excludingcommon stock falls below a threshold level, the Bank mustnotify the FCA and submit to them a written plan to restoreand maintain the ratio to at least that level. The core surplusratio excluding common stock was above the threshold levelas of the date of the merger.The FCA has issued Advance Notices of ProposedRulemaking on capital adequacy which could ultimately leadto significant changes in the System’s regulatory capital rules.CoBank 2011 Annual Report57