Annual Report - CoBank

The increase in Insurance Fund premiums resulted froma mid-2008 change in the base upon which premiums areassessed as well as increases in the premium rates. During thefirst half of 2008, premiums were 15 basis points ofoutstanding loan volume. Effective July 1, 2008, the premiumbase changed to adjusted Systemwide debt securities, which isa larger base than outstanding loan volume. Premiums were 15basis points and 18 basis points in the third and fourthquarters of 2008, respectively. Premium rates were increasedto 20 basis points for all of 2009. Effective January 1, 2010,premium rates were reduced to 10 basis points. As describedin Note 6 to the accompanying consolidated financialstatements, if amounts in the Insurance Fund exceed a “securebase amount,” such excess funds may be refunded to Systeminstitutions, which would reduce Insurance Fund premiumexpense.General and administrative expenses increased to $17.1million in 2009 from $15.0 million in 2008 due primarily tohigher levels of support provided to organizations thatadvance the mission of the System and the industries we serve.Employee compensation expense, which primarilyincludes salaries, incentive compensation and employeebenefits, increased slightly to $101.9 million, or by 1 percent,largely due to higher levels of staffing, mostly offset by lowerlevels of incentive compensation. Our staffing levels increasedin mid- to late 2008 due to several factors, including growth incertain loan portfolios, and the management of increased riskssurrounding the decline in loan quality and commodity pricevolatility. As of both December 31, 2009 and 2008, weemployed approximately 700 associates, compared toapproximately 630 at December 31, 2007. Incentivecompensation expense decreased in 2009 as 2008 resultsreflected exceptional performance as compared to targetedperformance for that period.Information services expense decreased to $16.4 millionin 2009 from $17.7 million in 2008 primarily due to highersoftware and support services expense in the prior-year.Purchased services expense was $7.6 million and $8.5 million,respectively, in 2009 and 2008. Purchased services expensewas lower in 2009 primarily due to a greater level of legalexpenses in 2008.Occupancy and equipment expenses were $6.8 millionand $7.1 million in 2009 and 2008, respectively. Our travel andentertainment expenses also decreased slightly to $8.9 millionin 2009 from $9.5 million in 2008.Farm Credit System related expenses of $6.6 million in2009 increased from $5.9 million in 2008 and substantiallyrepresent our share of costs to fund the operations of theFCA, our regulator. Each System institution is assessed a prorata share of the FCA’s total expenses based primarily on eachinstitution’s average risk-adjusted assets.Total noninterest expenses as a percent of net interestincome plus net fee income were 21.2 percent in 2009compared to 23.2 percent in 2008 and 26.8 percent in 2007.Excluding the impact of Insurance Fund premium expenses,operating expenses as a percent of net interest income plus netfee income were 16.0 percent in 2009, compared to 17.8percent in 2008 and 21.8 percent in 2007. For all periodspresented, the improvements are largely due to the increase innet interest income and fees more than offsetting the increasein operating expenses, which reflects the efficiency andscalability of our business model.The increase in total noninterest expenses from 2007 to2008 resulted principally from a $15.4 million increase inInsurance Fund premiums due to increased loan volume andchanges to the premium structure noted previously. Employeecompensation increased by $11.2 million in 2008 as comparedto 2007 due to increased staffing necessary to service greatercustomer financing activity and increased incentivecompensation related to stronger business and financialperformance.Provision for Income TaxesOur provision for income taxes increased to $166.3million in 2009 from $127.4 million in 2008 and our effectivetax rate increased to 22.7 percent for 2009 as compared to19.3 percent for 2008. The increase in both the amount andthe effective rate of income tax expense primarily resultedfrom a decrease in the level of expected patronagedistributions for 2009 as compared to 2008 due to lowerpatronage-based agribusiness loan volume. Our effective taxrates are significantly less than the applicable federal and statestatutory income tax rates primarily due to tax-deductiblepatronage distributions.Our effective tax rate for 2008 was generally consistentwith the 19.0 percent effective tax rate for 2007. In 2007, weincreased the rate at which we provide for federal and statetaxes from a combined 36.5 percent to 38.0 percent. Thechange in the marginal tax rate resulted from an increase instate tax expense, as certain income is no longer exempt fromtax in some jurisdictions, and from changes in certain state taxlaws.As more fully discussed in Note 10 to the accompanyingconsolidated financial statements, in 2007 our regulatoramended and restated the Bank’s charter to further clarify thetax exemption of certain of our business activities.CoBank 2009 Annual Report33