Annual Report - CoBank

Corporate Risk ProfileManaging enterprise risk is an essential part ofsuccessfully operating our Bank. Our primary risk exposuresare credit, interest rate, liquidity, operational and reputation.Credit risk is the risk of not collecting the amounts due onloans, investments or derivatives. Interest rate risk is thepotential reduction of net interest income and the market valueof equity as a result of changes in interest rates. Liquidity riskis the potential inability to repay obligations or fund borrowerson a timely basis. Operational risk is the risk of loss resultingfrom inadequate or failed processes or systems, breaches ofinternal controls or compliance requirements, the risk of fraud,and other operational matters. Reputation risk is the risk ofloss arising from negative public opinion.Business segments have the responsibility of identifying,controlling and monitoring risks. Our Risk ManagementGroup provides oversight of the Bank’s enterprise-wide riskmanagement through measurement and control processesaddressing all of the Bank’s primary risk exposures, includingcredit, interest rate, liquidity, operational and reputation. Thefollowing is a discussion of these risks, and our approach tomanaging them.Credit Risk ManagementCredit risk exists in our lending, investing and derivativesactivities. Credit risk in lending arises from changes in aborrower’s ability to repay funds borrowed, changes incollateral values, and changes in industry and economicconditions. Credit risk in our investment portfolio primarilyresults from changes in residential real estate values, defaultrates on collateral underlying mortgage-backed and assetbackedsecurities, and the credit worthiness of bond insurerswho insure certain of our investment securities. Credit risk inour derivatives portfolio results from changes in a derivativecounterparty’s ability to perform under the contract terms.We actively manage credit risk through a well-defined,Board-approved portfolio strategy, a structured and centralizedcredit approval process, a disciplined risk managementprocess, and a sound credit administration program. We haveestablished comprehensive credit guidelines and procedures toensure consistency and integrity of information related to thecredit risk in our loan, investment and derivatives portfolios.Various groups and committees within CoBank, includingour Board of Directors, have a role in managing credit risk, asdescribed below. Our Board of Directors establishes overalllending, investment and reserve policies. It also approves theloan portfolio strategy and reviews loan volume, loan qualitytrends, significant high-concern or troubled loans, and thecredit quality of our investment and derivatives portfolios.The CoBank Loan Committee (CLC), which is appointedby the President and CEO, and includes the Chief CreditOfficer and senior management of the Credit Group and thelending groups, holds ultimate credit authority as authorizedby Board policy. The CLC delegates lending authorities tospecific committees based on size of exposure and risk rating,and approves limits for investment obligors and derivativecounterparties. It acts on individual credit actions oradministrative matters and approves exceptions to exposurelimits if conditions warrant.The Credit Group is led by the Chief Credit Officer, whoreports to the President and CEO. The Credit Group managesthe credit approval process within concentration limitsestablished for the loan portfolio pursuant to Board policies.As part of the credit approval process, it reviews assigned riskratings for accuracy and conformity with our establishedguidelines, and recommends limits with respect to investmentobligors and derivative counterparties. It also managessignificant high-risk or troubled loans.The Risk Management Group is led by the Chief RiskOfficer, who reports to the President and CEO (with certainindividuals within this group having direct reportingresponsibility to the Audit Committee and the Board ofDirectors). The Risk Management Group overseesdevelopment of the loan portfolio strategy, the analysis of thereserve for credit exposure, and economic capital. It providesindependent reporting to the Board of Directors on the qualityof the Bank’s assets, the Bank’s system of internal controls,and material findings of the Asset Review and Internal AuditDivisions.The Asset and Liability Committee (ALCO), whichincludes the President and CEO, Chief Banking Officer, ChiefOperating Officer, Chief Financial Officer, Chief Risk Officer,Chief Credit Officer and Treasurer, oversees credit risk withinthe investment portfolio. It also reviews counterparty creditrisk arising from derivative transactions.Credit Risk Related to LoansThe key elements of our credit risk management related tolending include our portfolio strategy, the credit approvalprocess, and the use of exposure and concentration limits,which are explained below.Portfolio StrategyAs part of the annual business and financial planningprocess, the Board of Directors reviews and approves theBank’s loan portfolio strategy. Management regularlyanalyzes performance with respect to the portfolio strategyand reports the results to the Board of Directors. Theobjectives of our portfolio strategy are to safely fulfill ourlending mission to our customers, ensure appropriate portfoliodiversification, and optimize returns based on risk andprofitability, all within established capital parameters.CoBank 2011 Annual Report43