Annual Report - CoBank

The information and disclosures contained in this AnnualReport to Shareholders primarily relate to CoBank. Systemannual and quarterly information statements and press releasesfor the current fiscal year and the two preceding fiscal years,as well as offering circulars relating to System debt securities,are available for inspection at, or will be furnished withoutcharge upon request to, the Federal Farm Credit BanksFunding Corporation, 10 Exchange Place, Suite 1401, JerseyCity, New Jersey 07302; telephone (201) 200-8000. Thesedocuments are also available online through the Federal FarmCredit Banks Funding Corporation website atwww.farmcreditfunding.com. This website also provides alink to each System bank’s website where financial and otherinformation of each bank can be found. Similar links are alsoavailable at the CoBank website at www.cobank.com.Merger with U.S. AgBank, FCBU.S. AgBank, FCB (AgBank) merged with and intoCoBank effective January 1, 2012. The merged bank operatesunder the CoBank name and is headquartered outside Denver,Colorado. Robert B. Engel is the president and chief executiveofficer of the merged bank.Upon the date of the merger, CoBank became the fundingbank for the 25 Farm Credit Associations previously affiliatedwith AgBank. The merger with AgBank diversifies CoBank’sloan portfolio, builds our capital base and enhances our overalllending capacity.The 2011 results discussed within this Annual Report toShareholders are not reflective of the merger executed onJanuary 1, 2012. The merger is further discussed in “BusinessOutlook” on page 62 and in Notes 1 and 18 to theaccompanying consolidated financial statements.Our financial position remains strong as of December 31,2011, reflecting capital and liquidity levels significantly aboveregulatory minimums. With $4.9 billion in shareholders’equity, our permanent capital and core surplus ratios were16.37 percent and 10.02 percent, respectively, as ofDecember 31, 2011, both well in excess of the regulatoryminimum requirements of 7.00 and 3.50 percent, respectively.As of year-end 2011, we held $15.8 billion in investments andcash as a liquidity reserve and our days liquidity was234 days, also well in excess of the regulatory minimum of90 days.Overall credit quality in our loan portfolio improved in2011. Adversely classified loans decreased to 1.25 percent oftotal loans and related accrued interest at December 31, 2011,compared to 1.71 percent at December 31, 2010. Nonaccrualloans decreased to $134.9 million at December 31, 2011 from$167.0 million at December 31, 2010. Our provision for loanlosses decreased to $58.0 million in 2011 compared to$60.0 million for 2010.Due to continued weakness in the U.S. housing marketand broader economy, we recorded $10.0 million inimpairment losses in 2011 on certain of our mortgage- andasset-backed investment securities held in our investmentportfolio. Credit risk in this portfolio is minimal given thatapproximately 98 percent of our investment securities areguaranteed by the U.S. government or issued by a GSE.A five-year summary of selected consolidated financialdata is shown in the following table.OverviewCoBank recorded another year of record financialperformance in 2011. Our earnings grew to $706.6 million in2011, a 15 percent increase compared to 2010. Increasedearnings were driven by greater net interest income, whichgrew to $1.1 billion, or by 13 percent. Growth in fee incomealso contributed to stronger 2011 earnings. Higher net interestincome resulted from an increase in average loan volume,which grew by $4.7 billion, or 10 percent, primarily due toincreases in loans to customers in our Agribusiness operatingsegment, where increased prices and continued volatility forgrains and certain other agricultural commodities led togreater customer financing requirements. Our total loansoutstanding were $46.3 billion at December 31, 2011.CoBank 2011 Annual Report32