Financing Cooperatives: Does the Cooperative Model Still Work?

1. Financing Cooperatives:Does the Cooperative Model Still Work? 2009 ACE Institute July 29, 2009

2. Confidential and Proprietary

3. Agenda • The Farm Credit System • What are we? • Where does CoBank fit? • Recent tests for CoBank • Sky-rocketing Commodity Prices • Financial meltdown • Did CoBank pass the test? • Value proposition: Dependable, Responsive, Capacity, Ownership • Financial performance over time Confidential and Proprietary

4. Farm Credit System-CoBank Confidential and Proprietary

5. The Farm Credit System • Federally-chartered network of borrower-owned lending institutions providing credit to agriculture and rural America • 1 Agricultural Credit Bank (CoBank) • 4 Farm Credit Banks • 90 Associations that serve as the “front door” to rural America • Government Sponsored Enterprise representing over one-third of all U.S. agricultural lending • $215 billion in assets and $28 billion in capital at March 31, 2009 • The Funding Corporation of the FCS issues debt for System institutions, including CoBank • Regulated and examined by the Farm Credit Administration, an independent safety and soundness regulator in the executive branch of the U.S. government • Strong political support for the System’s mission in Washington, D.C. Confidential and Proprietary

6. CoBank at a Glance • A leading financial services company serving vital industries throughout the United States: • Agribusiness • Communications • Energy • Water • Over $62 billion in assets at March 31, 2009; AA- rated by both S&P and Fitch • Largest lender to farm supply and grain marketing cooperatives serving approximately 830 customer-owners Cooperatively owned • Headquartered in Denver, CO; regional offices and banking centers throughout the country • Approximately 700 employees nationwide Confidential and Proprietary

7. Ownership, Capital & Funding Flow Loans Equity Debt Securities Systemwide Debt Investors Other FCS Banks Federal Farm Credit Banks Funding Corporation Holders of Preferred Stock & Subordinated Debt Agricultural Cooperatives Rural Utilities Regional FCS Associations Other Eligible Borrowers Farmers and Other Members Rural Utility Customers Farmers and Other Producers Confidential and Proprietary

8. Loan & Lease Portfolio (1) Total $45.7 billion Communications, Energy & Water $11.11 billion Agribusiness $11.44 billion Strategic Relationships $14.74 billion Global Financial Services $8.44 billion (1) As of March 30, 2009 Confidential and Proprietary

9. Test I-Skyrocketing Grain Values Confidential and Proprietary

10. Loan Volume and Commodity Prices Confidential and Proprietary

11. Impact on the Industry/CoBank’s Portfolio • CoBank supported its customer-owners through a period of unprecedented price inflation • NO MARGIN CALLS WERE MISSED! • CoBank’s agribusiness loan volume increased $9.9 billion from 1/1/08 to 6/30/08. • CoBank has changed its traditional methods of credit extension and administration in response to these unexpected and rapid events • Risk, as measured by established methods, increased as total leverage has increased to support the buildup of current assets • Balancing CoBank’s mission to meet customer needs with safety and soundness Confidential and Proprietary

12. Test II-Financial Market Meltdown Confidential and Proprietary

13. Causes of the Financial Crisis • Fed lowered rates and fueled credit demand • Lending practices were out of control • Loans were securitized and sold around the world • Rating agencies failed to quantify risk • Investment strategies were not prudent Confidential and Proprietary

14. Investment Grade 364-day Bank Loan Spreads Confidential and Proprietary

15. Current Credit Market Conditions • Commercial Banks • There have been 57 bank failures through mid July with expectations for 100 by year end at a cost of $1.1 billion to the FDIC • Banks, Insurers and GSEs (FNMA/ FHLMC) have raised $1.2 trillion of capital, but have experienced losses of $1.4 trillion • The 15 largest banks in the world have lost $672 billion as compared to capital of $580 billion. The US government has infused $225 billion of capital to banks • More losses are expected because of further losses in home loans, commercial loans and credit cards • Supportive of top tier relationships • Focused on: credit quality, conservative structures, higher spreads and fees, ancillary business • Limited appetite for new investments Confidential and Proprietary

16. Did CoBank pass the tests? Confidential and Proprietary

17. How is CoBank Faring? • Mission bank balanced with safety and soundness practices • Support of Customers • Confidence in the market--GSE • CoBank has capital and capacity • Not immune from the financial crisis • Cost of funds/ interest rates are going up • Loan structure is more important • As credit needs grow, more difficult to find market partners • Changes are being made to deliver capacity Confidential and Proprietary

18. CoBank: Strength (ROE) Confidential and Proprietary

19. Financial Strength Total Loan & Lease Volume $ in billions Net Income $ in millions Confidential and Proprietary

20. Patronage Cash Stock and Participation Certificates Return on Active Patron Investment Patronage Distributions ($ in millions) $314 $245 $193 $168 $160 Confidential and Proprietary 20

21. Capital CSR minimum 3.5 % $ in billions $4.7 $4.6 $3.7 $3.0 $2.9 $2.9 PCRminimum 7 Subordinated debt Preferred stock Common stock & retained earnings Permanent capital ratio Core surplus ratio Confidential and Proprietary

22. Asset Quality Net Charge-Offs (Recoveries) / Average Loans and Leases Nonaccrual Loans and Leases / Total Loans and Leases * Reserve for Credit Exposure / Nonaccrual Loans and Leases Reserve for Credit Exposure / Total Loans and Leases * Annualized Confidential and Proprietary

23. Why is CoBank different? • CoBank is a cooperative—a good business model • We are owned by our member/ customers • Interests align for both parties • Management compensation is not based on stock prices--No golden parachutes or pay tied to stock prices • Built in checks and balances • Loans are paid back because of capacity and willingness on the part of the borrower • CoBank serves a very specific customer base • Life-line industries—a good place to be • CoBank generates strong earnings • Strong capital is needed to get capacity for our customers • Earnings are returned to our owners in cash & patronage Confidential and Proprietary

24. Questions? Confidential and Proprietary

25. Thank You