Annual Report - CoBank

Basis RiskBasis risk arises due to the differences between theinterest rate indices used to price our assets and the indicesused to fund those assets. While we attempt to match allindices, we will always have some basis risk as unanticipatedloan volume changes cause an excess or shortage of someforms of funding. We manage our basis risk through matchfunding, when possible, and using derivatives (primarilyinterest rate swaps) and other funding strategies.Measurement and Monitoring of Interest Rate RiskWe utilize several key risk measurement and monitoringtools to assist in the management of interest rate risk. Theseinclude interest rate gap analysis, duration gap analysis,sensitivity analysis of net interest income and market value ofequity, and net interest income forecasting, each of which isdescribed in further detail in the following pages.Interest Rate Gap AnalysisThe interest rate gap analysis shown in the following tablepresents a comparison of interest-earning assets and interestbearingliabilities in defined repricing timeframes as ofDecember 31, 2011. The interest rate gap analysis is a staticindicator that does not reflect future changes in repricingcharacteristics and may not necessarily indicate the sensitivityof net interest income in a changing interest rate environment.Interest Rate Sensitivity Analysis at December 31, 2011 ($ in Millions)Interest-earning Assets:Floating-rate Loans:Adjustable-rate/Indexed-rate LoansAdministered-rate LoansFixed-rate Loans:Fixed-rate Loans (1)Fixed-rate Loans, Prepayable (2)Nonaccrual LoansTotal LoansInvestment SecuritiesTotal Interest-earning Assets (3)Interest-bearing Liabilities:Callable Bonds and NotesNoncallable Bonds and Notes (4)Bonds, Medium Term Notes and Discount Notes (4)Effect of Interest Rate Swaps, Forwards, Futures, etc.Cash Investment Services Payable and OtherInterest-bearing LiabilitiesTotal Interest-bearing LiabilitiesInterest Rate Sensitivity Gap (Total Interest-earning Assetsless Total Interest-bearing Liabilities)Cumulative GapCumulative Gap/Total Interest-earning Assets(1) Prepayment penalties apply that compensate CoBank for economic lossesOne Monthor LessOver OneMonthThrough SixMonthsOver SixMonthsThroughOne YearOver OneYearThroughFive YearsOver FiveYears andNot RateSensitiveTotal$ 14,795 $ 2,555 $ - $ - $ - $ 17,3505,282 - - - - 5,2824,736 3,648 1,687 6,014 5,825 21,91087 154 156 556 655 1,608- - - - 135 13524,900 6,357 1,843 6,570 6,615 46,2853,683 1,481 1,462 4,201 2,168 12,995$ 28,583 $ 7,838 $ 3,305 $ 10,771 $ 8,783 $ 59,280$ 319 $ 279 $ 132 $ 456 $ 1,444 $ 2,63014,577 8,624 5,036 15,964 7,961 52,16214,896 8,903 5,168 16,420 9,405 54,79215,805 (2,111) (1,609) (10,935) (1,150) -2,312 - - - - 2,312$ 33,013 $ 6,792 $ 3,559 $ 5,485 $ 8,255 $ 57,104$ (4,430) $ 1,046 $ (254) $ 5,286 $ 528 $ 2,176$ (4,430) $ (3,384) $ (3,638) $ 1,648 $ 2,176(7.47) % (5.71) % (6.14) % 2.78 % 3.67 %(2) Freely prepayable or only minimal prepayment penalties apply(3) Does not include $2.8 billion in cash as of December 31, 2011(4) Includes subordinated debtCoBank 2011 Annual Report48