Annual Report - CoBank

Regulatory Capitalization Requirements and RestrictionsThe FCA’s capital adequacy regulations require us tomaintain certain minimum capital requirements and collateralstandards.We are prohibited from reducing permanent capital byretiring stock or making certain other distributions toshareholders unless prescribed capital standards are met. Allsuch minimum regulatory capital requirements and collateralstandards were met as of December 31, 2011.At December 31, 2011, our permanent capital, totalsurplus, core surplus and net collateral ratios exceeded theregulatory minimums as noted in the following table.Capital Ratios as of December 31,RegulatoryMinimumsPermanentCapital Ratio 7.0 % 16.37 % 14.30 % 15.29 %Total SurplusRatio 7.0 16.01 13.96 15.01Core SurplusRatio 3.5 10.02 8.42 8.77Net CollateralRatio 104.0 (1)(2) 109.05 108.03 108.67(1)preferred 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, theBank must notify the FCA and submit to them a written plan to restore andmaintain a level of at least 105.0 percent.2011 2010 2009The 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 AThe ratios are calculated in accordance with FCAregulations, as summarized below.The permanent capital ratio is quarterly averagepermanent capital (generally shareholders’ equity andsubordinated debt subject to certain limitations) asa percentage of quarterly average risk-adjusted assets.The total surplus ratio is quarterly average totalsurplus (generally shareholders’ equity, net ofpurchased stock, and subordinated debt subject tocertain limitations) as a percentage of quarterlyaverage risk-adjusted assets.The core surplus ratio is quarterly average coresurplus (generally unallocated retained earnings, noncumulativepreferred stock and a significant portionof common stock) as a percentage of quarterlyaverage risk-adjusted assets.The net collateral ratio is net collateral (generally netloans and investments) divided by total liabilities, asadjusted to exclude subordinated debt (subject tocertain limitations) and the fair value of certainderivatives.Pursuant to FCA guidance, effective July 1, 2011, webegan phasing out our Series A cumulative perpetual preferredstock ($163.3 million at December 31, 2011) from ourpermanent capital, total surplus and net collateral ratios at arate of 20 percent per annum. The impact to our regulatorycapital and collateral ratios was less than 0.1 percent during2011.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.CoBank 2011 Annual Report85