Annual Report - CoBank

Estimated Fair Value of Financial InstrumentsThe following table presents the estimated fair values of financial instruments that are recorded in the consolidated balance sheetsat cost, as well as certain off-balance sheet financial instruments, as of December 31, 2011, 2010 and 2009.Estimated Fair Value of Financial InstrumentsDecember 31,($ in Millions)CarryingAmount2011 2010 2009EstimatedFair ValueCarryingAmountEstimatedFair ValueCarryingAmountEstimatedFair ValueFinancial Assets:Net Loans $ 45,897 $ 47,647 $ 49,592 $ 50,613 $ 43,805 $ 44,337Financial Liabilities:Bonds and Notes $ 56,104 $ 57,678 $ 59,324 $ 60,094 $ 51,911 $ 52,493Subordinated Debt 1,000 955 1,000 953 1,000 877Off-Balance Sheet Financial Instruments:Commitments to Extend Credit $ - $ (102) $ - $ (80) $ - $(72)Net LoansOur loan portfolio includes fixed- and floating-rate loans.Since no active trading market exists for most of our loans,fair value is estimated by discounting the expected future cashflows using current interest rates at which similar loans wouldbe made to borrowers with similar credit risk.Bonds and NotesBonds and notes are not all regularly traded in thesecondary market and those that are traded may not havereadily available quoted market prices. To the extent thatquoted market prices are not readily available, the fair value ofthese instruments is estimated by discounting expected futurecash flows based on the quoted market price of similarmaturity U.S. Treasury notes, assuming a constant estimatedyield spread relationship between Systemwide Debt Securitiesand comparable U.S. Treasury notes.Subordinated DebtThe fair value of subordinated debt is estimated basedupon quotes obtained from a broker/dealer.Commitments to Extend CreditThe fair value of commitments to extend credit isestimated by applying a risk-adjusted spread percentage tothese obligations.Note 13 – Related Party TransactionsIn the ordinary course of business, we enter into loantransactions with customers, the officers or directors of whichmay also serve on our Board of Directors. Such loans aresubject to special review and reporting requirements containedin the FCA regulations, are reviewed and approved only at themost senior loan committee level within the Bank and areregularly reported to the Board of Directors. Except as notedbelow, all related party loans are made in accordance withestablished policies on substantially the same terms, includinginterest rates and collateral requirements, as those prevailing atthe time for comparable transactions with unrelated borrowers.During 2010, we made a $4.0 million loan to DixieElectric Membership Corporation (DEMCO), with whichRichard W. Sitman, a member of our Board of Directors, isaffiliated. The loan was made to refinance a portion ofDEMCO’s existing long-term indebtedness. CoBank’s pricingpolicy was unintentionally misapplied to this loan and the loanwas closed with an interest rate of 3.25 percent, which is lowerthan rates on similar loans to unrelated borrowers. As ofDecember 31, 2011, there was $3.6 million outstanding on thisloan, which is less than 10 percent of the Bank’s totalexposure to DEMCO.Total loans outstanding to customers whose officers ordirectors serve on our Board of Directors amounted to$257.2 million at December 31, 2011. During 2011,$3.0 billion of advances on loans were made and repaymentstotaled $3.3 billion. None of these loans outstanding atDecember 31, 2011 were delinquent, in nonaccrual oraccruing restructured status or, in the opinion of management,involved more than a normal risk of collectibility.CoBank 2011 Annual Report101