Annual Report - CoBank

Strategic RelationshipsApproximately $15.2 billion of our total loan portfolio atDecember 31, 2011 represented direct loans to our affiliatedAssociations and participations in the direct loans ofnonaffiliated Associations. The risk factors previouslydiscussed in the “Agribusiness” section can also affect loanquality at Associations; however, the impact of such factors onfarmers and other producers served by Associations may notbe the same as the impact on cooperatives and other customersserved by our Agribusiness operating segment. The loanquality of our Strategic Relationships portfolio is enhanced byour strong collateral position and the earnings, capital and loanloss reserves of the Associations, which provide us a bufferfrom losses in their respective loan portfolios.Rural InfrastructureWe fund the construction, operations and maintenanceactivities of rural energy, communications and watercompanies. A general slowdown in the U.S. economy canreduce industrial and residential demand for services andnegatively affect customers in our Rural Infrastructureportfolio. Changes in credit markets can also impact ourability to buy and sell loans in this portfolio.Fluctuating weather conditions can adversely affect ourcustomers in the energy industry. The pace and degree of therestructuring of the electric energy industry in the UnitedStates, including the need for additional generating capacityand the lack of open access transmission, may also impactfuture loan quality. Further, constraints on carbon emissionsand other environmental standards could adversely impactenergy customers.The communications industry is affected by significantcompetition. Regulatory, legislative and technological changesmay impact the future competitive position and markets forthe communications industry. These factors may placedownward pressure on the loan quality of certain sectors of thecommunications industry. In addition, decreased cash flowsand the resultant impact on asset valuation, the inability tosuccessfully integrate merged or acquired companies, or thelack of availability of debt and equity capital could adverselyaffect certain communications customers.Credit Quality Conditions and Measurements inOur Loan PortfolioThe following table presents loans and related accruedinterest receivable classified, by management, pursuant to ourregulator’s Uniform Loan Classification System, as a percentof total loans and related accrued interest.Loan Quality RatiosDecember 31, 2011 2010 2009Acceptable 96.68 % 94.76 % 95.83 %Special Mention 2.07 3.53 2.00Substandard 1.20 1.62 2.02Doubtful 0.05 0.09 0.15Loss - - -Total 100.00 % 100.00 % 100.00 %The overall credit quality in our loan portfolio improvedin 2011. Adversely classified loans (‘Substandard’ and‘Doubtful’) decreased to 1.25 percent of total loans and relatedaccrued interest at December 31, 2011, compared to1.71 percent at December 31, 2010, while ‘Special Mention’loans decreased to 2.07 percent of loans and related accruedinterest from 3.53 percent. These improvements included theimpact of upgrades in the credit quality classification of loansto two nonaffiliated Associations. At December 31, 2010, a$150.0 million loan to a nonaffiliated Association wasclassified as ‘Substandard’ while another $400.0 million loanwas classified as ‘Special Mention.’ Both of these loans wereupgraded to ‘Acceptable’ in 2011. We have a strong collateralposition in the assets of Association borrowers, and theearnings, capital and loan loss reserves of the Associationsserve as an additional layer of protection against losses. Noprovisions for loan losses or reserve for credit exposure havebeen recorded at the Bank related to any loans to Associations.Summary of High-Risk Assets ($ in Millions)December 31, 2011 2010 2009 2008 2007Nonaccrual Loans $ 135$ 167$ 308$ 218$ 15Accruing Loans 90 Days or More Past Due - 1 15 4 2Restructured Loans - - - - -Total Impaired Loans 135 168 323 222 17Other Property Owned 1 7 - - -Total High-Risk Assets $ 136$ 175$ 323$ 222$ 17CoBank 2011 Annual Report45