Annual Report - CoBank

Net fee income grew to $117.7 million in 2011 from$102.6 million in 2010. The increase in fee income wasprimarily driven by greater arrangement fees earned on loantransactions in our agribusiness and rural energy portfolios,where many customers refinanced their loans to takeadvantage of lower market interest rates.Prepayment income increased to $24.7 million in 2011from $18.8 million in 2010 due to a higher level of customerrefinancing resulting from the low interest rate environment.We extinguish debt to offset the current and prospectiveimpact of prepayments in our loan and investment portfoliosand to maintain a desired mix of interest-earning assets andinterest-bearing liabilities. During 2011, we extinguished$649.3 million of debt compared to $235.7 million in 2010.Losses on these early extinguishments of debt were$50.4 million in 2011 compared to $26.5 million in 2010. Thisincrease resulted from a higher level of debt extinguishmentsin an effort to achieve the desired mix of interest-bearingliabilities in a low interest rate environment.Other noninterest income decreased to $35.9 million in2011 compared to $47.7 million in 2010. The 2010 amountincluded $33.3 million in premium refunds from the FarmCredit System Insurance Corporation (Insurance Corporation)related to the Farm Credit Insurance Fund (Insurance Fund).There were no Insurance Fund premium refunds during 2011.As described in Note 5 to the accompanying consolidatedfinancial statements, when the Insurance Fund exceeds thestatutory 2 percent secure base amount (SBA), the InsuranceCorporation is required to reduce premiums and may refundexcess amounts. Other noninterest income for 2011 included a$10.0 million increase in customer derivative income drivenby customers locking-in or protecting their term funding costsin the low interest rate environment and a $4.5 million gain onthe sale of one of our previously impaired investmentsecurities.Total noninterest income increased by $13.6 million, or16 percent, in 2010 from $85.0 million in 2009. The increasein 2010 noninterest income included the previously mentionedrefunds of Insurance Fund premiums. In addition, fee incomeimproved by $12.7 million in 2010, primarily driven byincreased arrangement fees earned on loan transactions in ourcommunications and rural energy portfolios. Partiallyoffsetting these items were $29.0 million in increasedimpairment losses in 2010 as compared to 2009.Operating ExpensesThe following table details our operating expenses foreach of the last three years.Analysis of Operating Expenses ($ in Thousands)Year Ended December 31, 2011 2010 2009Employee Compensation $ 117,531 $ 98,971 $ 101,868Insurance Fund Premium 20,245 13,281 53,968Information Services 18,846 16,115 16,387General and Administrative 25,415 42,789 17,093Purchased Services 18,958 20,559 7,578Occupancy and Equipment 7,404 6,479 6,806Travel and Entertainment 12,425 10,922 8,895Farm Credit System Related 7,446 7,094 6,636Total Operating Expenses $ 228,270 $ 216,210 $ 219,231Total Operating Expenses/(Net Interest Income +Net Fee Income)19.2 % 20.5 % 21.2 %Operating Expenses, Net ofInsurance Fund Premium/(Net Interest Income +Net Fee Income)17.5 19.3 16.0Total operating expenses increased 6 percent in 2011 to$228.3 million, compared to $216.2 million for 2010, due toincreases in employee compensation expenses, Insurance Fundpremiums and expenses related to the merger with AgBank.Employee compensation expense, which primarilyincludes salaries, incentive compensation and employeebenefits, increased 19 percent in 2011 to $117.5 million,largely due to higher incentive compensation expense relatedto stronger financial performance and increased employeestaffing levels. As of December 31, 2011, we employed762 associates, compared to 719 and 698 at December 31,2010 and 2009, respectively.The increase in Insurance Fund premium expense resultedfrom an increase in premium rates for 2011, which were sixbasis points of average outstanding adjusted insured debtobligations, compared to five basis points for 2010. To a lesserextent, the increase also resulted from an increase in insureddebt obligations which funded the increase in average loanvolume.General and administrative expenses decreased to$25.4 million in 2011 from $42.8 million in 2010, as the 2010period included costs related to the settlement of a businessdispute in our Rural Infrastructure operating segment. Generaland administrative expenses in 2011 included $3.2 million inmerger-related expenses.CoBank 2011 Annual Report37