Strategies for Cooperatives in Turbulent Times Farmer Cooperative Conference Amy Gales, CoBank Central President November 18, 2008

Discussion  What lead to the financial melt down?  Main Street meets Wall Street  How is CoBank faring?  What strategies can cooperatives use to succeed in turbulent economic times?

Stock Market Quote of the Week: “This is worse than a divorce; I’ve lost half my net worth and I still have a husband.”

Causes of the Financial Crisis  Fed lowered rates and fueled credit demand  Lending practices were out of control Mortgage lenders were wildly aggressive Birth of the subprime market- $6 billion issued in 2006  Loans were securitized and sold around the world No incentive for lenders to make good loans

Causes of the Financial Crisis  Rating agencies failed to quantify risk AAA ratings given—same as government debt  New investors entered the market Hedge funds Institutional loan funds  Investment strategies were not prudent

MAIN STREET meets WALL STREET  Real estate values declined and adjustable interest rates kicked in

MAIN STREET meets WALL STREET

 High profile failures--write-offs, lack of liquidity Bail out for Fannie and Freddie Massive commercial and investment bank write-offs--$1 trillion of losses pulled $10 trillion of capacity from the market

Financial Melt Down  Global de-leveraging  Crisis of …….. Liquidity Capital Confidence

Pricing Up Copyright © 2008, Standard & Poor’s, a division of the McGraw-Hill Companies, Inc.; Source: Standard & Poor’s LCD; on Bloomberg: LCDZ Average All-in New-issue First-Lien Spread of BB/BB- Institutional Loans Assumes upfront fee is amortized evenly over a three-year assumed life; Upfront fee includes original issue discount As of 10/5/06 LCD began using Corporate Credit Ratings by S&P and Corporate Family Ratings by Moody’s for rated spread and rated upfront fee calculations

Current Credit Market Conditions  Commercial Banks Flight to quality Tighter covenants Need to raise capital? Pricing to risk Reluctant to buy into new credits  Farm Credit Institutions Good portfolio growth and quality Reserving liquidity for core borrowers

Copyright © 2008, Standard & Poor’s, a division of the McGraw-Hill Companies, Inc.; Source: Standard & Poor’s LCD; on Bloomberg: LCDZ Real Economy Heading Into Recession Lagging Twelve-Month Default Rate by Number of Issuers & Rolling Twelve-Month Number of Index Defaults Source: Standard and Poor’s LCD and S&P/LSTA Leveraged Loan Index Copyright © 2008, Standard & Poor’s, a division of the McGraw-Hill Companies, Inc.; Source: Standard & Poor’s LCD; on Bloomberg: LCDZ

How is CoBank Faring?  Mission bank balanced with safety and soundness practices  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 will be more important As credit needs grow, more difficult to find market partners

CoBank Loans Outstanding

Capital Ratios Core Surplus Ratio (3.5% regulatory minimum) Permanent Capital Ratio (7.0% regulatory minimum) * *July 2008 issuance of $200 million of non-cumulative preferred stock will increase this ratio by approximately 80 basis points. ** ** Effective 1/1/08, FCA allowed inclusion of a portion of common stock and participation certificates, increasing core surplus ratio by 165 basis points. July 2008 issuance of $200 million of non-cumulative preferred stock will increase this ratio by approximately 50 basis points.

Financial Strength $ in billions Total Loan & Lease Volume Net Earnings $ in millions 6/30/08 6/30/07 $335 $308 $205 $298 $275 $416 $261 $0 $50 $100 $150 $200 $250 $300 $350 $400 $ YTD

Asset Quality Net Charge-Offs (Recoveries) / Average Loans and Leases Nonaccrual Loans and Leases / Total Loans and Leases Allowance for Credit Losses / Nonaccrual Loans and Leases Allowance for Credit Losses / Total Loans and Leases 1.29% 1.82% 0.27% * * Annualized

Top 10 Strategies for Volatile Times 10. Build capital to handle the speed bumps Manage leverage Improve working capital 9. Generate strong profit No “sacred cows” Pull the trigger when margin objective met 8. Enhance ST and LT planning Understand the cost of doing business Spend money on the “right” things

Top 10 Strategies for Volatile Times 7. Block and tackle well 6. Heighten risk management Top shelf contracting New level of procedures and controls Manage price risk 5. Retain, grow and attract excellent talent 4. Provide the right leadership CEO vs. General Manager, CFO vs. Controller, Board that understands responsibilities and adds value

Top 10 Strategies for Volatile Times 3. Effectively communicate Internally, externally, related parties Keep your banker informed 2. Healthy to challenge the “old way” Be a seller not a hoarder of grain Add outside directors to add value 1. Watch for opportunities—there will be many!

Questions?