The Chairman & President's Message From the 2003 Annual Report

We are pleased to present to the Stockholders of Farm Credit Services
Southwest, the annual report for the twelve months ending December 31, 2003. This year’s annual report is for the three entities on a consolidated basis.

As you will see in this year’s report, the Association continued to perform at a very high level in 2003:

• Loans outstanding increased to $676 million on December 31, 2003, our highest level.
• Credit quality remained near its historical high level with over 97.6% of loans having no serious financial weaknesses.
• Nonaccrual loans, loans to borrowers experiencing the most serious financial problems, remained at $2 million, which was less than 0.3% of loans outstanding.
• Net earnings increased to $9.1 million from $6.3 million in 2002.
  

One factor that continued to affect virtually all of our members was the sharp decline in interest rates. Between 2001 and 2003, the Federal Reserve Board cut rates 5.75%. Short-term interest rates are at their lowest level in nearly 45 years. This decline in rates has reduced the Association’s borrowing costs and allowed the Association to reduce the rates charged on our variable and prime-based loans, which comprise over 70% of our portfolio.

Your Board of Directors’ goal is to return a portion of the Association’s earnings to our members through a patronage refund program. The Board has established certain financial goals that the Association must achieve in order to pay refunds. In 2001, the Association paid $2.5 million of cash patronage refunds. The Association did not achieve the Board’s goals in 2002 and was not
able to pay refunds. We are pleased to report that the Association achieved its financial goals in 2003 and will pay $3.2 million of refunds out of 2003 earnings. On average, the refund will reduce each eligible member’s effective interest rate ½% in 2003. We expect to pay these refunds in April 2004. In virtually all respects, 2003 was another outstanding year for your Association. However, we are continuing to look for ways to better serve our members. In so
doing we will focus on our strategy for long-term success, which is to:

• Provide outstanding customer service with a staff that is knowledgeable and committed to agriculture.
• Offer competitive interest rates and flexible loan products.
• Charge no fees or points for approved programs.
• When our financial goals are maintained, return a portion of our earnings via patronage refunds to our members.

By fully implementing this strategy we will deliver value to our members and build a successful Association that will be positioned to serve agriculture for many years.

Thank you very much for helping us achieve our success in 2003.

Equal Housing Lender - Equal Credit Opportunity Lender - Equal Opportunity Employer.

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