Strategies for Cooperatives in Turbulent Times Farmer Cooperative Conference Amy Gales, CoBank...

Strategies for Cooperatives in Turbulent Times

Farmer Cooperative ConferenceAmy Gales, CoBank Central PresidentNovember 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 STREETMAIN STREET meets WALL STREET

Real estate values declined and adjustable interest rates kicked in


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; www.standardandpoors.com; on Bloomberg: LCDZ <go>

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

L+100

L+200

L+300

L+400

L+500

1Q98

Jan-

99

May

-99

Sep-9

9

Jan-

00

May

-00

Sep-0

0

Jan-

01

May

-01

Sep-0

1

Jan-

02

May

-02

Sep-0

2

Jan-

03

May

-03

Sep-0

3

Jan-

04

May

-04

Sep-0

4

Jan-

05

May

-05

Sep-0

5

Jan-

06

May

-06

Sep

-06

Jan-

07

May

-07

Sep-0

7

Jan-

08

May

-08

Sep-0

8

Straight Spread Upfront fee over three year assumed maturity

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


Real Economy Heading Into RecessionLagging 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 Lagging 12-months Default Rate by Number of Issuers

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Rolling 12-months Number of Defaults

0

5

10

15

20

25

30

35

40

Dec-9

8

Jun-

99

Dec-9

9

Jun-

00

Dec-0

0

Jun-

01

Dec-0

1

Jun-

02

Dec-0

2

Jun-

03

Dec-0

3

Jun-

04

Dec-0

4

Jun-

05

Dec-0

5

Jun-

06

Dec-0

6

Jun-

07

Dec-0

7

Jun-

08

Twelve-months Ended


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 OutstandingCoBank Loans Outstanding

Capital Ratios

5.7% 5.9%5.1% 4.9%

5.8%

10.9%11.4%

13.7%15.1%

12.1%

13.7%

6.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2003 2004 2005 2006 2007 6/ 30/ 2008

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

$33.1

$49.4

$33.9

$26.3$24.0

$40.5

$24.8

$0

$10

$20

$30

$40

$50

$60

2003 2004 2005 2006 2007 6/ 30/ 08 6/ 30/ 07

$ i

n b

illi

on

s

Total Loan & Lease Volume

Net Earnings

$ i

n m

illi

on

s

6/30/086/30/07

$335$308

$205

$298$275

$416

$261

$0$50

$100$150$200$250$300$350$400$450

2003 2004 2005 2006 2007 YTD YTD

Asset Quality

0.01%0.04%

-0.04%

0.12%0.09%

2003 2004 2005 2006 2007 6/ 30/ 2008

Net Charge-Offs (Recoveries) / Average

Loans and Leases

0.15%0.25%

0.04%

0.77%

0.46%

2003 2004 2005 2006 2007 6/ 30/ 2008

Nonaccrual Loans and Leases / Total Loans and

Leases

531% 577%

130%

3020%

237%365%

2003 2004 2005 2006 2007 6/ 30/ 2008

Allowance for Credit Losses / Nonaccrual Loans

and Leases

0.89%

1.32%

1.66%

1.10%

1.68%

2003 2004 2005 2006 2007 6/ 30/ 2008

Allowance for Credit Losses / Total Loans and

Leases

1.29%

1.82%

0.27%

*

* Annualized

Top 10Top 10Strategies for Volatile TimesStrategies 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


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


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?

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