Farm Credit West: 2007 Financial & Operating Highlights
Future Focus
Financial Performance Indicators
2007 Annual Report to the Stockholders

Farm Credit West: 2007 Financial & Operating Highlights

• 2007 net income was an all time high of $84 million, and as a result we were able to increase patronage paid to customers to $20 million (a $3 million, or 18 percent, increase).
• The volume of loans/leases and securities at December 31, 2007 increased to $3.6 billion (a $407 million, or 13 percent, increase); without the 2007 security sale to US AgBank, that increase would have been about $500 million (or 15 percent).
• Our leasing program achieved yet another all-time high -- we booked 727 leases totaling $95 million in 2007 (vs. the previous record 648 leases for $73 million in 2006). When including lease participations sold and operating leases, total lease volume was $189 million at December 31, 2007
• Asset quality remained very positive and non-earning assets remained less than one percent of assets.
• Loan charge-offs were in modest amounts -- 0.01 percent of average loans.

Farm Credit West’s mission is to ensure THE CUSTOMER COMES FIRST by providing superior service at competitive rates in a timely, professional, and ethical manner. One of the key means we use to assess performance in meeting that mission is a customer satisfaction survey. In 2007, 1,245 surveys were mailed and 637 were returned (51 percent response rate). The overall service rating matches the highest level achieved in any year since the last merger was completed as of December 31, 2001. Of those responding, 630 indicated they would recommend Farm Credit West -- a tremendous accomplishment! While we are proud of managing assets that totaled more than $4.6 billion, the positive relationships that those balances (big and small) represent are far more significant. As long as we continue providing “superior customer service at competitive rates”, the results should remain very positive.

A key aspect which differentiates us is our ongoing efforts to simplify the lending process. We continue to believe that any forthright comparison would show that our loan documentation and lending process is much simpler and more efficient than that of any of our competitors -- and we remain committed to seeking further improvements therein. We are very pleased to be able to continue delivering real value to you, the stockholders/owners.

Another key aspect of providing a competitively priced product is our patronage program. For the seventh consecutive year, the Board has taken action to distribute patronage refunds in cash. This year’s refunds totaled $20 million -- an 18 percent increase from 2006’s $17 million in patronage, and a 100 percent increase from the $10 million in patronage declared in 2004! Eligible customers received their refunds in early 2007, bringing the total refunds disbursed since February 2002 to $76 million. We continue to be very excited about this program which adds further value to your relationship with Farm Credit West. Not only will interest rates remain competitive, credit availability consistent, and service excellent, if operations continue to be as successful as we project, we will continue providing patronage on an annual basis to customers who remain in good standing. This will not only differentiate us from our competitors, but it will also provide our customers lower costs and a competitive advantage in their own operations, thereby “adding value” for those who do business with Farm Credit West.

The preferred stock program provides another means of “adding value” to the customer relationship. This program enables our customers to provide us the capital needed to support growth, while the customer is paid an attractive dividend on their investment. During 2007 we obtained stockholder approval to increase the maximum from $100 million to $200 million, and as a result, stockholder Preferred Stock investments averaged $104 million; we paid customers $6 million in preferred stock dividends in 2007! Combined with a 2007 average of $107 million held in customer-owned future payment funds, during 2007 customers entrusted us with an average of $211 million of their funds. In addition to the $20 million we paid customers in patronage, we paid customers $6 million in preferred stock dividends and $5 million in Future Payment fund interest -- thus 2007-related payments to customers will total about $31 million!

We encourage stockholders to continue to make use of other services (leasing, fee appraisal services, etc.). Today’s business environment makes it more important than ever that we meet customer needs through a variety of service delivery channels.

Farm Credit West is now offering customers a full-feature, sophisticated cash management service through CoBank, ACB (and their affiliated service provider). Customers who have investigated this service have found it consistently to be more cost effective than the services provided by our commercial bank competitors. Truly, another “value added” service to help our customers compete in today’s global market place. Program utilization expanded in 2007 and we have added additional staff in 2008 to promote the program and expand it even further for the benefit of our customers.

Future Focus
Merger with Sacramento Valley Farm Credit

During 2007 your Board of Directors began discussions with Sacramento Valley Farm Credit about a potential merger. After a comprehensive evaluation process, those discussions were fruitful, and in early December the two Boards approved proceeding with obtaining the necessary approvals (funding bank, regulatory, and stockholder) to allow consummation of the merger as of April 30, 2008. Sacramento Valley Farm Credit is an ideal merger partner because they share the same commitment to customer service that we do. In addition, the combination increases the level of capital, which enhances our ability to serve an agricultural industry that is itself consolidating into ever larger entities. Also, the merger provides further diversification of risk both in terms of geography as well as commodities financed, and that reduces economic capital requirements by an estimated $20 million, further expanding our lending capacity. And last but not least, this merger provides us a more central headquarters location in the Sacramento metropolitan area where State government and most agricultural organizations with state headquarters are located. It positions us well for the future.

While achieving significant results during 2007, Board and management maintained their focus on ensuring future customer service.

• We continued to be a System leader in developing enhanced methods of assessing loan-by-loan risk as well as managing portfolio-wide credit risk. Our economic capital analyses indicate that we have economic capital in excess of the amount required to meet a “AA” solvency standard, which equates to a default only three times in 10,000 situational simulations.
• We took action effective January 1, 2008 to add an additional staff member in leasing to enable us to provide leasing services in the existing Sacramento Valley Farm Credit territory and throughout California .
• During 2007 a site was selected and purchased in the Templeton area for a new office facility which will enable us to consolidate the existing Paso Robles and Arroyo Grande lending staff into that single location. The new office should be completed and occupied prior to the end of 2008.
• As noted in the Annual Report's Management's Discussion and Analysis of Financial Condition and Results of Operations, our efforts to serve the credit and related needs of young, beginning, and small farmers (YBS) within our chartered territory were expanded. We exceeded two of our three goals for improved service to this very important category of customers during 2007.
• While we are not subject to the requirements of the Sarbanes-Oxley Act, we consider many of its provisions to represent “best practices”, and we have complied where practical. The Board has strengthened the independence of the Audit Committee, established a “whistleblower” program for the receipt and handling of anonymous complaints, strived to simplify and improve the control over financial reporting, and improved the disclosure of information through our website.

We appreciate each customer's patronage of Farm Credit West. Your Board and management have every intention of continuing the tradition of providing “superior customer service at competitive interest rates”.

Second Quarter Financial & Operating Highlights: (for the former Farm Credit West only) 

·         Loan, Lease, and Security Volume: Loan and lease volume (net of loan participations and the allowance for loan losses) was $3.4 billion at March 31, 2008 -- an increase of $653 million (24%) in the twelve months since March 31, 2007 and an increase of $145 million (4%) since December 31, 2007.  In addition, at March 31, 2008 we serviced loans totaling $990 million for other institutions.

The $3.8 billion total volume of loans and investment securities at March 31, 2008 represents a $592 million (19%) increase in Loans and Investment securities over the past twelve months and a $132 million (4%) increase in such assets since December 31, 2007.  March 1, 2007 Farm Credit West sold to U.S. AgBank, FCB (AgBank) $108 million of our investment security – available-for-sale.  We recognized a $2.1 million gain related to the value of those mortgage servicing rights and other beneficial interests retained in connection with that $108 million security sale.

Moderate year-over-year growth in the combined total of loans and investment securities is expected given marketing and customer relations initiatives.

·         Credit Risk Management: To help manage and diversify credit risk, our credit risk management framework includes securitizing loans, obtaining credit guarantees, selling loan participation interests, limiting “hold” positions below to amounts below legal lending limits, and prudently establishing individual lending limits based on asset quality.  As of March 31, 2008 significant risk reduction was achieved on $81 million of loan volume, which was covered under a Long Term Standby Commitment to Purchase agreement with the Federal Agricultural Mortgage Corporation.  That credit guarantee gives us the right to sell the loans identified in the agreement to the Federal Agricultural Mortgage Corporation in the event a delinquency of four months occurs.

·         Portfolio Quality: Loan quality has not changed materially over the past 15 months.  Throughout that period loan quality has remained positive and within the range acceptable to the Board and management.

·         Nonearning Assets: Nonearning assets (nonaccrual loan volume plus the volume of foreclosed assets) totaled $35 million at March 31, 2008.  This level represents a 78% increase since March 31, 2007 and a 99% increase since December 31, 2007.  Both increases are related to the March 2008 transfer to nonaccrual status of one large loan complex.  Nonearning assets were 1.0% of loan volume and interest at March 31, 2008 -- a level that is within the range acceptable to the Board and management.

·         Allowance for Loan Losses and 2007 Loss Activity: Our allowance for loan losses (Allowance) totaled $7.05 million (0.2% of loan principal and interest) at March 31, 2008; the Allowance was 0.3% of loan principal and interest at March 31, 2007.  The Allowance is our best estimate of the amount of probable losses existing in, and inherent in, our loan portfolio as of the balance sheet date.  We determine the Allowance based on a regular evaluation of the loan portfolio, which generally considers recent historic charge-off experience adjusted for relevant factors.

We have recorded one small loan loss in 2008 (totaling $10 thousand) as well as a relatively small amount of recoveries of prior loan losses (totaling $60 thousand).  This activity is consistent with our long-term experience of moderate loan losses.

·         Noninterest Expense: Total noninterest expense increased 10% for the first three months of 2008 compared to the same period in 2007.  This $0.8 million aggregate increase is largely due to increases in: (a) salaries and employee benefits (a $0.3 million increase); (b) Farm Credit System Insurance Corporation insurance fund premiums (a $0.2 million increase); and, (c) data processing services expense (a $0.1 million increase).

·         Net Income: Net income for the three months ended March 31, 2008 was $21 million  --  an annualized rate of return on average assets of 2.20%.  Net income for the first three months of 2007 was $22 million -- an annualized rate of return on average assets of 2.63%.  The key components in this year-over-year $1 million (2%) decrease in net income was the $2 million 2007 gain on mortgage servicing rights recognized on the March 1, 2007 security sale.  Despite lower market interest rate, net interest income has increased $0.5 million (2%) given 2008’s larger volume of earning assets and increased liquidity.

·         Amounts of Capital and Capital Adequacy: In the past twelve months total members’ equity has increased $86 million (16%) - - unallocated retained earnings have increased $57 million (13%) and, consistent with the stockholders having approved an increase to the preferred stock program’s maximum size, preferred stock has increased $22 million (23%).

For the quarter ended March 31, 2008 we substantially exceeded each regulatory minimum capital requirement.  For the quarter our permanent capital, total surplus, and core surplus ratios were 13.78%, 10.75%, and 10.21%, respectively.  All three capital ratios exceeded the 10.0% optimum capital level established for each capital ratio by the Board in our 2008 Capital Adequacy Plan.

Second Quarter Financial & Operating Highlights: (for the former Sacramento Valley Farm Credit only)

·         Loan, Lease, and Security Volume: New loans (including commercial loan commitments) total $54 million for the first three months of 2008, a 38% increase over the $39 million of the new money booked during the same period of 2007. New loan volume results for both years are very positive. Average earning assets grew to $784 million for the first three months of 2008, a 10.3% increase over average earning asset levels for the first quarter of 2007.

·         Portfolio Quality: Credit quality at March 31, 2008, with 99.0% of the loan portfolio not considered adversely classified, is slightly higher than that measure at December 31, 2007. The volume of loans in nonaccrual status has decreased by $0.1 million since year-end with the current level at $3.2 million. Management believes the allowance for loan losses is adequate to provide for losses inherent in the portfolio.

·         Nonearning Assets: The volume of loans in nonaccrual status has decreased by $0.1 million since year-end with the current level at $3.2 million.

·         Allowance for Loan Losses: Management believes the allowance for loan losses is adequate to provide for losses inherent in the portfolio.

·         Noninterest Expense: Salary and benefit expense in 2008 was $0.1 million higher than 2007 levels due to salary increases and additions of staff in response to increased loan volume. Other noninterest expense in 2008 was $0.1 million higher than 2007 levels due to higher FCSIC premiums and increased cost of space.

·         Net Income: Net income was $2.9 million for the first three months of 2008, which is $0.1 million lower than last year due to the following: We recorded a reversal of provision for loan losses of $0.1 million during the first quarter of 2008, compared with a loan loss reversal of $0.2 million during the same period of 2007. The reversals in both periods were based on improved credit quality, reduced loss exposure relating to certain higher-risk commodities, and payments received on under-collateralized impaired loans. Other noninterest income increased by $0.3 million, primarily due to higher patronage income in 2008.

·         Amounts of Capital and Capital Adequacy: All capital ratios continued to meet the required levels after distributing $1.5 million in cash patronage refunds to members in February 2008. FCA regulations require the Association to maintain a core retained earnings ratio of at least 3.5% and a total retained earnings ratio of 7.0%. At March 31, 2008, these ratios were 11.1% and 11.7%, respectively. In addition, our permanent capital ratio of 11.90% exceeds the minimum required of 7%.

Financial Performance Indicators (these indicators are for the combined former Farm Credit West and Sacramento Valley Farm Credit)

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