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Year-End Financial Results

CoBank Reports Full-Year Financial Results for 2011

CoBank has announced fourth-quarter and full-year financial results for 2011 and full-year earnings and net interest income reached record highs. Loan quality also improved throughout the year and CoBank’s overall levels of capital and liquidity remained strong.

“We’re extremely pleased with CoBank’s business performance in 2011,” said Robert B. Engel, president and chief executive officer. “Throughout the year, we were able to effectively meet the borrowing needs of customers and build the financial strength of the bank, despite difficult conditions in the financial markets and the broader U.S. economy. In addition, we successfully executed our merger with U.S. AgBank, which expanded our customer base, enhanced the diversification of our loan portfolio and increased our capital position. We remain focused on delivering on our value proposition for customer-owners, and on ensuring the bank can fulfill its mission serving vital industries in rural America.”

2011 Financial Results
Average loan volume during 2011 was $50.2 billion, up 10 percent from the prior year. Most of the increase occurred in the bank’s Agribusiness operating segment, where higher prices for corn, soybeans and wheat drove increased seasonal borrowing by many cooperatives and other agricultural businesses. The bank also experienced higher average loan volume in its Rural Infrastructure operating segment, largely due to growth in lending to rural electric distribution cooperatives throughout the country.

“Commodity markets were an important driver of CoBank’s financial results during the year, and we’re pleased we were able to stand by our agribusiness customers to meet their needs in conditions that remained volatile,” Engel said. “Also noteworthy was the bank’s success in the rural electric industry, where we continued to demonstrate our value proposition and grow market share.”

In CoBank’s Strategic Relationships operating segment, average loan volume increased approximately 1 percent in 2011. That segment includes the bank’s wholesale loans to affiliated Farm Credit associations and other organizations in the Farm Credit System that are primarily focused on production agriculture. “Ironically, the same higher commodity prices that increased borrowing by cooperatives last year helped suppress loan demand from association customers,” Engel said. “Many farmers around the country experienced strong profits in 2011 and opted to finance their operations with cash, reducing their need for loans from associations. While association lending grew only moderately last year, we’re pleased that the overall health of the U.S. farm economy remains so strong.” 

In the fourth quarter of 2011, CoBank experienced year-over-year declines in seasonal agribusiness lending due to lower prices of some commodities as well as changing delivery patterns at grain cooperatives. Total loan volume for the bank at December 31, 2011, was $46.3 billion, compared with $50.0 billion at the end of 2010.

Full-year net interest income for CoBank rose 13 percent to $1.1 billion, from $950.8 million in 2010.  In the fourth quarter, net interest income was $241.3 million, compared to $275.9 million the prior year, largely due to the fourth-quarter factors cited above. CoBank’s full-year net income was $706.6 million, up 15 percent from $613.8 million in 2010. Net income for the fourth quarter of 2011 was $143.9 million, compared with $162.8 million in the same period the prior year.

In March, the bank will pay $340.7 million in total patronage distributions, including $230.7 million in cash and $110.0 million in common stock. For most customers, that represents 100 basis points of average loan volume, lowering their overall net cost of debt capital from CoBank.

“Strong, dependable patronage is an important component of the CoBank value proposition,” Engel said. “As a cooperatively organized lender, we’re delighted with the patronage payout authorized by our board this year and with the benefit it will provide to our customers.”

Credit quality across the bank’s loan portfolio improved during 2011 and remained well within the risk-bearing capacity of the bank. At year-end, 1.25 percent of the bank’s loans were classified as adverse assets, compared to 1.46 percent at the end of the third quarter of 2011 and 1.71 percent at December 31, 2010. The provision for loan losses totaled $58.0 million in 2011, compared with $60.0 million the year before. Nonaccrual loans were $134.9 million at December 31, 2011, compared with $167.0 million at year-end 2010.

The bank’s reserve for credit exposure totaled $542.0 million at year-end, or 1.92 percent of nonguaranteed loans and leases outstanding when loans to Farm Credit associations are excluded. “Our reserve for credit exposure is strong and provides a solid level of protection against losses in our loan portfolio,” said David P. Burlage, CoBank’s chief financial officer.

Capital and liquidity levels at the bank remain strong and well in excess of regulatory minimums. As of December 31, 2011, shareholders’ equity totaled $4.9 billion, and the bank’s permanent capital ratio was 16.4 percent, compared with the 7.0 percent minimum established by the Farm Credit Administration (FCA), the bank’s independent regulator. At year end, the bank held approximately $15.8 billion in cash and investments. The bank averaged 199 days of liquidity during 2011 and had 234 days at year end, compared with the 90-day FCA minimum.

During the year, the bank recorded $10.0 million in impairment losses on investment securities compared to $44.0 million in 2010. These impairments relate to the 2 percent of the bank’s investment portfolio that consists of non-agency mortgage-backed securities or asset-backed securities. The remainder of the portfolio – approximately 98 percent – consists of securities that carry an implicit or explicit guarantee from the U.S. government.

U.S. AgBank Financial Results
As previously announced, CoBank closed its merger with U.S. AgBank on January 1, 2012, and the banks’ results for 2011 are being reported separately. U.S. AgBank served primarily as a wholesale provider of financing to Farm Credit associations in the western, southwestern and mid-plains regions of the country and had total assets of $25.1 billion at December 31, 2011.

AgBank’s net interest income for the year was $148.1 million, compared with $152.3 million in 2010. Full-year net income was $129.2 million, compared with $136.6 million the year before. Credit quality in the AgBank loan portfolio was very strong, reflecting the low risk profile of its association customer base. At year-end 2011, none of AgBank’s loans were classified as adverse assets. 

CoBank will begin reporting combined financial results in the first quarter of 2012. “Given the excellent credit profile of AgBank’s former association customers, we expect to see an improvement in overall credit quality for CoBank as a result of the merger,” Burlage said. “At the same time, we expect overall average margins to decrease commensurate with the addition of AgBank’s low-risk, low-spread association loan portfolio.”

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