Annual Report - CoBank

Incentive Compensation PlansWe have a broad-based, Board-approved short-termincentive compensation plan covering substantially allemployees pursuant to which annual cash awards may beearned. Criteria used to determine amounts payable includethe achievement of specified financial measures and strategicbusiness objectives, which are approved annually by theCompensation Committee of the Board of Directors.Individual performance is also considered in the determinationof the amount payable.We also have a Board-approved long-term incentivecompensation plan, pursuant to which cash awards may beearned by senior officers and specified other senior managerswho have a significant impact on long-term financialperformance. Criteria used to determine amounts payableinclude achievement of certain Bank financial targets andstrategic business objectives over a three-year performanceperiod. Cash awards are to be paid subsequent to completionof each three-year period, subject to approval by theCompensation Committee of the Board of Directors.Under the terms of the short-term incentive compensationplan, a minimum return on active patron stock investmentmust be achieved in order for a payout to be approved.Likewise, a minimum return on active patron stock investmentmust be achieved in each year within the three-yearperformance period for a full payout under the long-termincentive plan. The required minimum return on active patronstock investment was 11 percent for all performance periodsdisclosed herein.Note 9 – Income TaxesThe components of the provision for income taxes are asfollows:Year Ended December 31, 2011 2010 2009Current:Federal $ 79,914 $ 117,056 $ 86,256State 14,518 15,134 18,612Total Current 94,432 132,190 104,868Deferred:Federal 90,246 24,209 59,425State 11,428 3,028 1,984Total Deferred 101,674 27,237 61,409Total $ 196,106 $ 159,427 $ 166,277Comprehensive Tax ProvisionAllocable to:Pre-Tax Income $ 196,106 $ 159,427 $ 166,277Shareholders’ Equity -Amounts Allocated to:Investment Securities 21,988 26,451 64,759Derivatives 981 (2,386) 279Pension Liability (8,271) (3,089) 2,705Total $ 210,804 $ 180,403 $ 234,020The components of deferred tax assets and liabilities areshown below.December 31, 2011 2010 2009Reserve for Credit Exposure $ 176,334 $ 159,930 $ 149,800Employee Benefits 41,436 30,447 26,299Loan Origination Fees 19,851 19,701 21,006Unrealized Net Losses onInvestment Securitiesand Derivatives - - 1,184Other Deferred Tax Assets 43,539 51,921 35,067Gross Deferred Tax Assets 281,160 261,999 233,356Leasing 480,418 367,603 312,977Unrealized Net Gains onInvestment Securities 45,851 22,881 -and DerivativesOther Deferred Tax Liabilities 14,714 14,966 15,617Gross Deferred Tax Liabilities 540,983 405,450 328,594Net Deferred Tax Liabilities $ (259,823) $ (143,451) $ (95,238)Deferred income taxes are provided for the change intemporary differences between the basis of certain assets andliabilities for financial reporting and income tax reportingpurposes. The expected future tax rates are based uponenacted tax laws.The effective tax rates for the years ended December 31,2011, 2010 and 2009 of 21.7 percent, 20.6 percent and22.7 percent, respectively, were significantly less than thestatutory income tax rate primarily due to the distribution orplanned distribution of $340.7 million, $284.6 million and$268.9 million, respectively, of taxable income as qualifiedpatronage distributions, which are tax deductible as permittedby Subchapter T of the Internal Revenue Code. To a lesserextent, the effective tax rate is lower than the statutory rate ascertain of our business activities are tax-exempt.Year Ended December 31, 2011 2010 2009Federal Tax at Statutory Rate $ 315,943 $ 270,618 $ 256,092State Tax, Net 17,196 11,120 14,145Patronage Distributions (118,434) (99,130) (94,777)Tax-Exempt Activities (20,546) (21,348) (760)Other 1,947 (1,833) (8,423)Provision for Income Taxes $ 196,106 $ 159,427 $ 166,277We will distribute 38 percent of income before incometaxes to our shareholders as qualified patronage distributionsrelated to 2011, compared to 37 percent for both 2010 and2009.CoBank 2011 Annual Report92