The Chairman & President's Message From the 2004 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, 2004. 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 2004. In many respects, 2004 was a record-setting year for your Association:

• Loans outstanding increased to $712 million on December 31, 2004, our highest level to date.
• Credit quality remained near its historical high level with over 97.9% of loans having no serious financial weaknesses.
• Nonaccrual loans, loans to borrowers experiencing the most serious financial problems, fell to $298 thousand, which was less than 0.1% of loans outstanding. This was the lowest level of seriously troubled loans in the Association’s history.
• Net earnings increased to $19.0 million from $9.1 million in 2003. This was the highest level of earnings in the Association’s history. As discussed in this report, the Association reduced its allowance for loan losses in 2004, which increased earnings $8.7 million.

In part, these outstanding results were due to an improvement in our operating environment. Interest rates remained near their historically low levels for most of the year. Commodity prices, particularly dairy prices, improved dramatically. And, the drought, which has seriously impacted our region for the past nine years, began to moderate.

One of the most important goals of your Board of Directors is to return a portion of the Association’s earnings to its members through a patronage refund program. The Board has established certain financial goals that the Association must achieve in order to pay refunds. We are pleased to report that the Association achieved its financial goals in 2004 and will pay $3.3 million of refunds out of 2004 earnings. The Association paid $2.5 million of cash patronage refunds in 2001 and $3.2 million of refunds in 2003. In 2002, the Association did not meet its financial goals and was not able to pay patronage refunds. On average, the refund will reduce each eligible member’s effective interest rate ½% for 2004. We expect to pay these refunds in April 2005.

In virtually all respects, 2004 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 continue serving agriculture for many years.

Thank you very much for helping us achieve our success in 2004.

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

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