cAoM Cobafq bApq | OMNM ANNrAi obmloq
qhe Association minimizes its interest rate risk by funding loans with debt from CoBank that has similar pricing characteristicsK As a resultI the Association is not subject to substantial interest rate riskK qhe Association’s loan portfolio consisted of the following breakdown by pricing typeW As of aecember PN
OMNM
OMMV
jembers’ bquity fn conjunction with its annual financial planning processI the Association’s Board of airectors reviews and approves a Capitalization mlanK qhe objective of the plan is to build and maintain adequate capital for continued financial viability and to provide for growth necessary to meet customer needsK
OMM8
qotal members’ equity totaled ATSMKQ million for the twelve months ended aecember PNI OMNMK jembers’ equity at aecember PNI OMNM was comprised of unallocated surplus of ARRVKQ millionI additional paidJin capital of ANSQKQ millionI allocated surplus of AQRKR millionI customer capital stock and participation certificates of ANOKM millionI and accumulated other comprehensive loss of YAOMKU> millionK
mricing qypeW sariable rate loans
SPKMB
SPKVB
SNKQB
fndexed loans EmrimeI AojI ifBloF
NMKNB
VKRB
VKQB
cixed rate loans
OSKVB
OSKSB
OVKOB
As discussed previouslyI a OMNM qualified distribution was declared totaling APRKM million paid in cash subsequent to year endK qotal accumulated allocated surplus was AQRKR million at aecember PNI OMNMK qhe Association plans to redeem its existing allocated surplus by the year OMNQI subject to the Association’s Capitalization mlanK fn conjunction with that planI the Association redeemed ANMKM million during OMNMK
qhe interest rates charged to the Association on debtI by and largeI have the same pricing characteristics as the loans fundedK cor exampleI fixed rate loans are funded with fixed rate debt with the same termK qhe Association’s goal is to fund fixed and indexed rate loans with NMMB matching debtK qhe Association’s equity is invested in variable rate loansK qhe yield on equity funded loans is the average variable portfolio rateK As rates rise or fallI earnings on equity funded loans go up and downK qhe Association also uses interest rate contracts EswapsF with CoBank to better manage its equity investment in variable rate loansK then rates are lowI the Association earns more on its interest rate contractsI offsetting lower earnings on its equity position and serving to stabilize net interest incomeK EConverselyI when rates riseI the Association will earn less on its contracts and more on its equity positionFK qhe average length of the Association’s contracts is about NO monthsK qhe effect of this hedging strategy diminishes if rates stay stable for two or more yearsK
qhe AssociationI along with other pystem institutionsI is subject to regulatory oversight by cCAK fn addition to the Association’s Board approved Capitalization mlanI a number of rules and regulations are imposed under the carm Credit Act on the operations of pystem entitiesI including requirements to maintain a minimum permanent capital ratioI total surplus ratioI and core surplus ratioK As displayed in the following tableI the Association exceeded the minimum regulatory requirementsI which are noted parentheticallyK
qhe swaps also extend the duration of the Association’s equity position resulting in increased earnings from the normal yield curve and some change in the value of equity due to changes in interest ratesK qhe Association’s interest rate hedging program is summarized in the following table EA in millionsFW As of aecember PN
pwap notional amount
OMNM
OMMV
A OUMKM
A OQMKM
As of aecember PN
OMNM
OMMV
OMM8
jembers’ equity as a B of assets
NTKNB
NSKRB
NRKVB
mermanent capital ratio ETKMBF
NRKUB
NRKQB
NQKTB
qotal surplus ratio ETKMBF
NRKRB
NRKNB
NQKQB
Core surplus ratio EPKRBF
NQKTB
NQKPB
NPKSB
OMM8
cinancial condition ratios for OMNM are consistent with the Association’s current Capitalization mlan and long term objectivesK cor a description of the Association’s capitalization requirementsI equitiesI and regulatory capitalization requirements and restrictionsI see kote T to the consolidated financial statementsI “jembers’ bquity”K Association management knows of no reason that would cause the Association not to meet these standards in the foreseeable futureK
A OPMKM
salue
A
NKN
A
OKM
A
QKM
Cash pettlements
A
OKU
A
QKP
A
NKR
cor additional informationI see kote NP to the consolidated financial statements “aerivative fnstruments and eedging Activities”K
NM