Annual Report - CoBank

Notwithstanding the increase in average loan volume,Agribusiness period-end loan volume decreased to$18.9 billion at December 31, 2011 from $22.7 billion atDecember 31, 2010. The decrease in period-end loan volumeresulted from lower seasonal agribusiness lending due to adrop in prices for some agricultural commodities in the latterpart of 2011 as well as changing delivery patterns at graincooperatives.Agribusiness recorded a $37.0 million provision for loanlosses in 2011 compared to $7.2 million for 2010. Theincrease reflects an overall higher level of averageAgribusiness commitments as well as specific creditchallenges facing a small number of customers. Net chargeoffsdecreased to $4.0 million in 2011 compared to$21.7 million for 2010. Nonaccrual loans decreased to$80.3 million at December 31, 2011 compared to$93.4 million at December 31, 2010.Noninterest income in our Agribusiness segmentincreased by $19.8 million in 2011 due to a decrease in thelevel of impairment losses in our investment portfolio and anincrease in fee income, which was driven primarily by greaterarrangement fees. Noninterest income also improved due tocustomer derivative income and the gain on the sale of aninvestment security in 2011. As described on page 37, the2010 period included refunds of a portion of Insurance Fundpremiums paid in prior years. Operating expenses in ourAgribusiness segment increased by $28.0 million in 2011 dueto greater employee compensation expense, merger-relatedexpenses and Insurance Fund premiums. Income tax expensein the Agribusiness operating segment increased $23.5 milliondue to the growth in pretax earnings.Strategic RelationshipsOverviewAs of year-end 2011, the Strategic Relationshipsoperating segment includes the direct funding relationshipswith our four affiliated Association customer-owners, as wellas our funding relationships with nonaffiliated Systeminstitutions. See Note 17 to the accompanying consolidatedfinancial statements for further discussion of our affiliatedAssociations. In addition, the supplemental schedules thatfollow the accompanying consolidated financial statementscontain unaudited combined financial information of ouraffiliated Associations.As a result of the merger with AgBank, on January 1,2012 the number of our affiliated Associations increased by 25and now includes Associations headquartered in Arizona,California, Colorado, Connecticut, Hawaii, Idaho, Kansas,Maine, New Mexico, Oklahoma, Utah, Vermont andWashington. The merger resulted in an $18.9 billion increasein outstanding loan volume in our Strategic Relationshipsoperating segment on January 1, 2012. For additionalinformation on the financial impact of the merger, refer toNote 18 for our unaudited pro forma condensed combinedfinancial statements as of December 31, 2011.At December 31, 2011, our Strategic Relationshipsportfolio included $11.2 billion of direct loans to our fouraffiliated Associations and $4.0 billion of purchasedparticipations in loans made by three other System banks tocertain of their affiliated Associations, most notably, the FarmCredit Bank of Texas ($3.4 billion).We are focused on developing and maintaining strongrelationships with Farm Credit Associations and banks.Partnerships with Associations allow us to provide credit andnon-credit services to a more diverse set of customers. TheAssociations’ strong market presence and local relationshipmanagement, combined with our product suite and lendingcapacity, provide a competitive advantage in attracting andretaining customers.2011 PerformanceAverage Strategic Relationships loan volume increased1 percent to $15.2 billion in 2011 compared to $15.1 billion in2010, reflecting modest loan demand at our affiliatedAssociations. Strategic Relationships net income increasedslightly to $80.8 million for 2011 from $80.4 million for2010. The increase in earnings was primarily the result ofa $2.2 million increase in net interest income, partiallyoffset by the impact of merger-related expenses. StrategicRelationships has no income tax expense as the earningson its business activities are tax exempt.Overall loan quality in our Strategic Relationshipsportfolio remains strong. As a wholesale lender to Associationcustomers, we benefit from the diversification of theAssociation loan portfolios and our strong collateral position.In addition, the earnings, capital and loan loss reserves of theAssociations provide us a buffer from losses in their respectiveloan portfolios. Lower margins in the Strategic Relationshipsoperating segment are commensurate with the lower riskprofile and lower regulatory capital requirements. Noprovisions for loan losses or reserve for credit exposure havebeen recorded related to any loan to an Association. The creditquality classifications of loans to two nonaffiliatedAssociations were upgraded in 2011 from the ‘Substandard’and ‘Special Mention’ categories to ‘Acceptable.’CoBank 2011 Annual Report41