Annual Report - CoBank

Purchased services expense decreased to $19.0 million in2011 from $20.6 million in 2010. The 2011 period included$9.8 million of merger-related expenses compared to$5.0 million in 2010, both of which largely related to outsideadvisors who assisted with transaction analysis and integrationactivities. Purchased services expense in 2010 included legalfees relating to the settlement of a business dispute and costsassociated with efforts to more closely align our loanprocessing practices with our enterprise-wide riskmanagement objectives.Information services expense increased to $18.8 millionin 2011 from $16.1 million in 2010 due largely to mergerintegration efforts. Occupancy and equipment expenses were$7.4 million and $6.5 million in 2011 and 2010, respectively.Our travel and entertainment expenses increased to$12.4 million in 2011 from $10.9 million in 2010, dueprimarily to merger-related travel costs and a greater level ofexpenditures on customer meetings and other customer-facingactivities.Farm Credit System related expenses of $7.4 million in2011 increased from $7.1 million in 2010 and substantiallyrepresent our share of costs to fund the operations of the FCA,our regulator. Each System institution is assessed a pro ratashare of the FCA’s total expenses based primarily on eachinstitution’s average risk-adjusted assets.Total operating expenses as a percent of net interestincome plus net fee income was 19.2 percent in 2011compared to 20.5 percent in 2010 and 21.2 percent in 2009.Excluding the impact of Insurance Fund premium expense,operating expenses as a percent of net interest income plus netfee income was 17.5 percent in 2011, compared to19.3 percent in 2010 and 16.0 percent in 2009. The decreasesin the 2011 operating expense ratios primarily reflect greaternet interest income and fee income more than offsettingincreased operating expenses.The decrease in total operating expenses in 2010 from2009 resulted principally from a $40.7 million decrease inInsurance Fund premiums. In the second quarter of 2010, theInsurance Corporation reduced full-year 2010 premiums tofive basis points of average outstanding adjusted insured debtobligations from the 10 basis points it had initially set for2010. Premium rates were 20 basis points for all of 2009.Partially offsetting this item was a $25.7 million increase ingeneral and administrative expenses and a $13.0 millionincrease in purchased services. General and administrativeexpenses increased in 2010 due to the settlement of a businessdispute in our Rural Infrastructure operating segment.Purchased services expense increased in 2010 as a result ofmerger-related expenses, legal costs related to the settlementof a business dispute, and costs associated with a loanprocessing initiative.Provision for Income TaxesOur provision for income taxes increased to$196.1 million in 2011 from $159.4 million in 2010, resultingfrom the increase in our pre-tax earnings. Our effective taxrate increased to 21.7 percent for 2011 from 20.6 percent for2010, reflecting a change in estimated taxes applicable tocertain deferred tax items and a higher level of earnings in thetaxable portion of our business activities. Our effective taxrates are significantly less than the applicable federal and statestatutory income tax rates primarily due to tax-deductiblepatronage distributions and our tax-exempt business activities,which includes our Strategic Relationships operating segment.Our effective tax rate decreased to 20.6 percent for 2010compared to 22.7 percent for 2009. The decrease resulted fromincreased earnings in 2010 in the tax-exempt portion ofCoBank’s business activities.Operating Segment Financial ReviewWe conduct lending operations through three operatingsegments – Agribusiness, Strategic Relationships and RuralInfrastructure.We hold investment securities to provide the liquiditynecessary to support our core lending operations. Accordingly,net interest income on investment securities is allocated to alloperating segments, whereas the underlying investment assetsare not allocated to the operating segments.In addition to the operating segments described below,our Banking Services Group (BSG) provides capital marketsservices and non-credit products and services. As part of itscapital markets services, which support our lending divisions,BSG manages syndications and loan sales with approximately130 financial institutions. In 2011, we syndicated or soldapproximately $23.6 billion of loan commitments to Systementities and other financial institutions to help meet customers’credit needs and to effectively manage our capital and riskdiversification.BSG’s non-credit products and services include cashmanagement, commercial credit card and merchant cardprocessing solutions. Revenues generated from non-creditproducts and services, as well as BSG’s operating expenses,are allocated to the appropriate operating segments. BSG’sKnowledge Exchange Division provides the Bank and theindustries we serve strategic insight to enhance understandingof emerging business opportunities and risks.Net income by operating segment is summarized in theaccompanying table and is more fully disclosed in Note 14 tothe accompanying consolidated financial statements. Thefollowing tables also provide period-end and average loanamounts.Net Income by Operating Segment ($ in Thousands)Year Ended December 31, 2011 2010 2009Operating Segment:Agribusiness $ 438,082 $ 365,247 $ 288,533Strategic Relationships 80,806 80,446 96,964Rural Infrastructure 194,418 175,596 184,477Total Operating Segments 713,306 621,289 569,974Corporate/Other (6,719) (7,522) (4,558)Total $ 706,587 $ 613,767 $ 565,416CoBank 2011 Annual Report38