Annual Report - CoBank

The notional amount of our derivatives and relatedexposure to customer counterparties were $3.1 billion and$152.5 million, respectively, at December 31, 2011 comparedto $2.2 billion and $77.4 million, respectively, atDecember 31, 2010. Customer derivative agreements aresecured through our loan agreements.Liquidity Risk ManagementWe must continually raise funds to provide credit andrelated services to customers, repay maturing debt obligationsand meet other obligations.Our primary source of liquidity is the ability to issueFederal Farm Credit Banks Consolidated Systemwide bonds,medium term notes and discount notes (collectively referred toas Systemwide Debt Securities), as well as the use of availablecash. Additionally, if necessary, we could convert high creditquality and liquid investments to cash. We and other Systembanks maintain a liquidity framework wherein U.S. Treasuryand other U.S. government-guaranteed securities aremaintained. Pursuant to these requirements, the first 15 daysof maturing debt coverage must be maintained with cash, cashequivalents and/or U.S. Treasury securities with maturities ofless than three years. The next 30 days of debt coverage isgenerated from investment securities with an explicitguarantee from the U.S. government, and highly-ratedcommercial paper that matures in 45 days or less. We were incompliance with the 15 and 45 day liquidity requirementsthroughout 2011.As a result of the System’s credit quality and standing inthe capital markets as a GSE, we have traditionally maintainedready access to debt-funding, notwithstanding volatility in thecredit markets and the 2011 downgrades of the long-term U.S.sovereign credit rating and the System’s long-term debt rating,as discussed in “Other Risk Factors” beginning on page 54.Our liquidity management objectives are to meetmaturing debt obligations, provide a reliable source of fundingto borrowers, provide additional liquidity if market conditionsdeteriorate for a period of time and fund operations on a costeffectivebasis. Approximately 67 percent of our interestearningassets mature or reprice in one year or less with48 percent maturing or repricing in one month or less. Matchfundingthese assets from a maturity perspective would createan unacceptable concentration of short-term liabilities.Instead, we manage this risk by issuing longer-term debt andswapping this debt from a fixed to floating rate usingderivative transactions, as previously described. By so doing,we reduce the need to fund maturing liabilities on any givenbusiness day to a more manageable level. While we believethat sufficient resources are available to meet liquiditymanagement objectives through our debt maturity structure,holdings of liquid assets and access to the capital markets viathe Funding Corporation, the volatility of our loan volumecauses our liquidity to vary significantly from day to day.The amounts and maturities of our debt obligations are setforth in the table below.Debt Maturities as of December 31, 2011 ($ in Millions)BookPar1Day (1) $ 2,312$ 2,3122-7 Days 84 848-30 Days 1,901 1,90131-90 Days 3,199 3,19991-180 Days 4,423 4,403181-365 Days 10,102 10,0691-5 Years 24,689 24,104Over 5 Years 10,394 10,144Total $ 57,104$ 56,216(1) Includes $792.3 million of cash collateral payable to derivative counterparties thatdoes not have a stated maturity date.See Notes 5 and 15 to the accompanying consolidatedfinancial statements for information regarding interest ratesand maturities of Systemwide Debt Securities, andcontingencies.Due to the often volatile funding needs of certaincustomer sectors, in particular Agribusiness customer sectorsimpacted by seasonal borrowing requirements and changingcommodity prices, we provide a significant amount ofrevolving loan commitments. At December 31, 2011,commitments to extend credit and commercial letters of creditwere $27.3 billion and $383.3 million, respectively. Inaddition, we provide standby letters of credit, which guaranteepayment or performance of an obligation. As of December 31,2011, the maximum potential amount of future payments thatwe may be required to make under standby letters of creditwas $1.3 billion. Since many of these commitments mayexpire without being drawn, the total commitments do notnecessarily represent future cash requirements. Our exposureto many of these commitments is mitigated by borrowing baserequirements contained in loan agreements. See Note 10 to theaccompanying consolidated financial statements for a fulldiscussion of financial instruments with off-balance sheet risk.We monitor our liquidity position by assuming no abilityto issue debt and calculating the number of days into the futurewe could meet maturing debt obligations by using availablecash and liquidating investments. FCA regulation requires usto maintain a minimum of 90 days of liquidity (cash andreadily marketable investments generally discounted by 5 to10 percent of market value) on a continuous basis. Ourmanagement target is 180 days of liquidity. During 2011, weaveraged 199 days of liquidity compared to an average of240 days in 2010. As of December 31, 2011, we had 234 daysof liquidity, compared to 198 days at December 31, 2010.CoBank 2011 Annual Report52