The Chairman & President's Message From the 2002 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, 2002. 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 achieved a number of milestones in 2002:

• Loans outstanding increased to $654 million on December 31, 2002, our highest level and nearly 17% above loans outstanding at the end of 2001.
• Credit quality also improved to the highest level. On December 31, 2002, over 98% of loans had no significant financial problems. On December 31, 2001, the credit quality percentage was 97%.
• Nonaccrual loans, loans to borrowers experiencing significant financial problems, fell to $2 million, which was half the amount outstanding at the end of 2001.

Net earnings decreased from $11.2 million in 2001 to $6.3 million in 2002. However, in 2001, the Association recognized $5.5 million of tax-related income from a refund of prior year taxes. Excluding this refund, the Association’s 2002 earnings were $0.6 million greater than 2001 earnings.

A factor that affected virtually all of our members in 2002 was the sharp decline in interest rates. During 2001 and 2002, the Federal Reserve Board cut rates 5.25%. Short-term interest rates are now at their lowest level in over 40 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 via a patronage refund program. In 2001, the Association paid $2.5 million of cash patronage refunds. However, to ensure the Association maintains a sound financial condition, the Board has established certain financial goals that the Association must achieve in order to pay refunds each year. Unfortunately, due to the rapid growth in loans in 2002, the Association did not achieve the Board’s capital goal and, therefore, the Association was not able to pay refunds out of 2002 earnings. A key goal of this year’s business plan is to find ways to increase capital levels and again pay refunds in 2003.

In virtually all respects, 2002 was an outstanding year for your Association. However, we are not resting on our laurels and we continue to 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 member/stockholders 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 2002.

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

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