At each year-end, the Board of Directors evaluates whether to retain Farm Credit West's net income to strengthen our capital position or to distribute a portion of the net income to customers by declaring a qualified/cash patronage refund. Whether it is distributed in cash or maintained as surplus, since 2001 Farm Credit West has allocated 100% of its net income to the customers who helped earn it. Most businesses return their profits to their owners, not their customers. When you borrow from Farm Credit West, you become an owner of the business — as well as a customer — and are entitled to share in the profits. Farm Credit West offers a variety of credit and financial services along with considerable knowledge of the agricultural industry.

Qualified Patronage Refunds are Paid in Cash
Annually, the Board determines what portion of net earnings is to be returned in cash to each customer (via what is known as a qualified written notice of allocation) based on each customer's contribution to earnings. Generally, such cash patronage refunds are tax deductible to Farm Credit West and taxable to the customer receiving the refund.

The Remainder of Farm Credit West's Earnings are Allocated as Well
That portion of Farm Credit West’s earnings not distributed in cash is also allocated to customers. These allocated, but not distributed, patronage refunds are added to Farm Credit West’s surplus account. Such allocations may provide a future basis for a distribution of capital. In accordance with Internal Revenue Service requirements, Farm Credit West sends each customer what is known as a nonqualified written notice of allocation. However, the allocation is, generally, not taxable to the customer or tax deductible to the Association.

Evaluating the Financial Impact of Patronage Refunds
While payment of patronage refunds to customers is very positive, each entity’s financial circumstances differ. Farm Credit West staff is happy to provide patronage refund information to you or your tax advisor, but such information should not be relied upon as regards your specific circumstances. FARM CREDIT WEST RECOMMENDS PATRONAGE REFUND RECIPIENTS CONSULT THEIR TAX ADVISOR FOR SPECIFIC GUIDANCE.

Frequently Asked Questions

What is a patronage refund?
A patronage refund is a way of allocating Farm Credit West's net income to its member-stockholders. Since this program was begun (and again for refunds to be paid in 2008, based on 2007 earnings), a customer's refund has been based on:

• Interest (or lease income) earned on the customer’s loans/leases, proportionate to:
• The total interest (and lease income) earned by Farm Credit West.

**Beginning with refunds to be paid in 2009 that will be based on 2008 earnings, customer refunds will be allocated based on the proportion of:

• The average principal balance of the customer's loans/leases, proportionate to:
• The total average balances of all patronage-eligible loans/leases at Farm Credit West.

At Farm Credit West, each year's patronage refund is comprised of two components: (1) a cash payment to the customer (a "qualified" refund) and (2) a non-cash (“nonqualified") portion that is retained and becomes a part of the Association's surplus account. A qualified/cash patronage refund is a way to refund a portion of the interest income (or lease earnings) you contributed.

Since Farm Credit West distributes refunds based on the amount of interest (or lease income) earned on each customer’s loan/lease, the more business you do with Farm Credit West, the larger your potential patronage refund.

How do patronage refunds benefit Farm Credit West borrowers?
Your qualified/cash patronage refund reduces the cost of doing business with Farm Credit West. When borrowing from Farm Credit West you not only borrow at competitive rates, you can also potentially earn a qualified/cash patronage refund on the interest you pay. In effect, the cash refund lowers your interest rate.

How much can I expect to earn?
Qualified/cash refunds vary, depending upon earnings and the overall financial goals of the organization. Over the years, the Board has enhanced the payout under this program -- the qualified/cash payments to be made in 2007 from 2006 earnings averaged 0.50%; this same average amount was paid in 2006 from 2005 earnings. This is a significant increase from the 0.40% payments made in 2005 from 2004 earnings.

Refunds to be paid in 2008 based on 2007 earnings will once again reduce average customer interest rates by about 0.50%!

How might a qualified patronage refund be calculated?
Suppose you borrow $100,000 for the year at a 10.00% average interest rate. You would pay $10,000 in interest during the year. If Farm Credit West customers paid an aggregate $10 million in interest (and lease earnings) for that year, you would receive 0.10% of any qualified/cash patronage refund paid.

Of course, this is only an example. All factors in the example are subject to change. Nonetheless, the bigger the proportion of Farm Credit West's earnings that are attributed to your loan – from higher borrowings or higher interests rates – the larger your refund. Again, this allocation method will change for refunds to be paid in 2009 and based on 2008 earnings.

How and when is my patronage refund issued?
If the Board of Directors approves payment of a qualified/cash patronage refund, 100% of the qualified/cash portion of your patronage refund is paid to you by check early in the following year based on the prior year's earnings.

Who receives patronage refunds?
Patronage is allocated to patrons (holders of the regulatory required minimum level of 2% of loan balance or $1,000 of voting stock or Participation Certificates) in proportion to their contribution to Farm Credit West’s interest income (or lease earnings). Specifically excluded are customers whose obligations are: (1) both in default and in nonaccrual status at year end; (2) purchase money mortgages and sales contracts; (3) participations purchased, unless the participating institution is a Farm Credit West stockholder and there is an agreement for Farm Credit West to pay the institution patronage; or, (4) specified in advance as not eligible for patronage and for which the borrower has expressly waived patronage.

Do I pay taxes on the refund?
Generally, a qualified/cash patronage refund is taxable to the recipient (and tax deductible to Farm Credit West). Nonqualified written notices of allocation are, generally, not taxable (nor are they tax deductible for Farm Credit West). Consult your tax advisor about your specific situation.

Will I receive a tax notification regarding my qualified patronage refund?
Yes. In January of the year following your receipt of a patronage refund, Farm Credit West will send you an IRS Form 1099. This form will show the total of all qualified/cash patronage refunds issued to you during the previous year. The nonqualified portion of the patronage refund will not be reported as taxable income.

How do patronage refunds benefit Farm Credit West?
Qualified/cash patronage refunds help Farm Credit West reduce its tax expense, while nonqualified refunds help the Association maintain a strong capital position. With a strong capital position Farm Credit West will be better able to offer competitive interest rates and remain a dependable and reliable provider of credit to agricultural producers.

Does Farm Credit West raise interest rates to pay this refund?
No. Because Farm Credit West operates very efficiently, we are able to offer very competitive rates and a patronage refund.

Why doesn't Farm Credit West lower interest rates and eliminate the patronage program?
Farm Credit West’s objective is to provide “superior service at competitive rates”. Investors need the security of knowing that we have the ability to generate earnings. Farm Credit West needs to build capital and loss reserves to withstand the cycles of the ag economy. Earnings capability, capital, and loss reserves result in lower-cost funds, which we pass on to customers.

Why doesn't Farm Credit West distribute all earnings in cash?
The long-term viability of Farm Credit West depends on the ability to build capital to fund growth or other credit services needed by customers. By maintaining nonqualified patronage refunds in its surplus account, Farm Credit West is building the necessary capital to enhance its ability to continue as a dependable and reliable provider of credit to agriculture.

Patronage refunds issued in the form of nonqualified notices can only be retired, or paid to members, upon approval of the Board. The Board has no plans to pay/revolve these nonqualified amounts. The resources represented by these nonqualified notices are retained by Farm Credit West as surplus to ensure a strong, stable capital base.

Why don’t banks pay patronage?
As a cooperative Farm Credit West is positioned to return its profits to its member-borrowers. Banks return their profits to investors who own the bank; those investors may not even use the services of the bank.

What is the bottom line on patronage refunds?
Qualified/cash patronage refunds reduce your interest cost and save you money. If you’re borrowing from a lender that doesn’t return a portion of its profits to you, consider doing more of your business with Farm Credit West — where you are the stockholder. Remember, you own Farm Credit West and you share in the profits.

Still have questions?
Call the Farm Credit West office that services your loan and talk to a loan officer. They’ll be happy to discuss the benefits of patronage refunds.

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