Annual Report - CoBank

Business OutlookWe closed our merger with AgBank on January 1, 2012.The merger will create opportunities across the industries weserve and will significantly enhance the geographic andindustry diversification of our loan portfolio. It will alsoprovide us with the opportunity to strengthen businessoperations and enhance market opportunities for CoBank‘sproducts and services. We believe the merger will create astronger, more durable financial institution with an enhancedability to fulfill its mission, both today and for futuregenerations of rural borrowers.As we look to 2012, we see a number of challenges thatcould make the lending and earnings environment lessfavorable for CoBank. Agricultural commodity prices haveretreated from last year’s highs and growth remains lacklusterin the broader economy. Loan demand in our StrategicRelationships segment has moderated due to the strongliquidity positions of many farmers and ranchers. Customersin certain of the industries we serve continue to feel the impactof unpredictable and volatile agricultural commodity prices, acontinued weak housing market, and regulatory and politicaluncertainty. These challenges could reduce the credit qualityand level of loan demand in certain sectors of our lendingportfolio. Continued weakness in the housing market and/orpersistently high unemployment could also lead to furtherlosses on our non-agency investment securities. Greaterliquidity in debt funding markets and a renewed focus bybanks on commercial lending continues to increasecompetition across many of the sectors we serve. In addition,the lower level of medium-term interest rates negativelyimpacts the return on our invested capital.In 2012, we will focus on preserving the strength of ourbalance sheet, executing on our merger integration plan andenhancing our enterprise-wide risk management capabilities.Our strong capital and liquidity position will continue toprovide the capacity to serve customers in all marketconditions. We will continue our disciplined approach tomanaging risk and will closely monitor asset quality. We willalso continue to enhance our financial condition throughprudent expense discipline and the retention of a portion ofour earnings.Our continued success will be achieved by delivering onour value proposition, creating opportunities to partner withother System institutions, increasing market share,maintaining effective access to the agency debt capitalmarkets, optimizing current lending authorities and pursuingvarious strategic alliances with other financial servicesorganizations.Under the guidance of our Board of Directors and throughthe focus of a proven executive management team, we lookforward to continuing to deliver on our value proposition onbehalf of our customers and to fulfilling our mission as adependable and strategic source of credit and financialservices to the nation’s rural economy.CoBank 2011 Annual Report62