2012 farm credit east annual report

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2012 Farm Credit East Annual Report

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Page 1: 2012 Farm Credit East Annual Report
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i m p a c t2 0 1 2 A n n u A l R e p o R t

f r o m f i e l d t o e c o n o m i c e n g i n e

2 0 1 2 f i n a n c i a l s

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FARM CREDIT EAST | 2012 ANNUAL REPORT

Consolidated Five-Year Summary of SelectedFinancial Data(dollars in thousands) 2012 2011 2010 2009* 2008*BALANCE SHEET DATA Loans 4,692,668$ 4,352,586$ 4,275,104$ 3,079,138$ 2,976,624$ Less: Allowance for loan losses 74,954 64,586 55,395 40,764 31,353 Net loans 4,617,714 4,288,000 4,219,709 3,038,374 2,945,271 Cash 25,332 13,592 12,493 5,389 13,121 Investment in CoBank, ACB 156,938 149,828 144,139 107,551 98,907 Other property owned 2,533 3,337 2,609 267 755 Other assets 65,774 64,919 68,218 46,672 47,197 Total assets 4,868,291$ 4,519,676$ 4,447,168$ 3,198,253$ 3,105,251$ Obligations with maturities of one year or less 69,201$ 62,510$ 52,925$ 40,152$ 33,698$ Obligations with maturities greater than one year 3,956,600 3,645,745 3,633,787 2,630,249 2,578,311 Total liabilities 4,025,801 3,708,255 3,686,712 2,670,401 2,612,009 Capital stock and participation certificates 12,602 12,242 11,962 8,850 8,763 Additional paid-in capital 164,369 164,369 164,369 0 0 Allocated retained earnings 0 34,846 45,488 41,528 47,846 Unallocated retained earnings 702,235 632,697 559,424 493,417 450,627 Accumulated other comprehensive loss (36,716) (32,733) (20,787) (15,943) (13,994) Total members' equity 842,490 811,421 760,456 527,852 493,242 Total liabilities and members' equity 4,868,291$ 4,519,676$ 4,447,168$ 3,198,253$ 3,105,251$ STATEMENT OF COMPREHENSIVE INCOME DATA Net interest income 142,038$ 141,396$ 134,427$ 95,665$ 80,718$ Provision for loan losses 20,000 15,000 20,000 15,000 7,500 Noninterest expenses, net 11,861 16,984 12,727 14,339 12,853 Provision for income taxes 639 628 693 136 351 Net income 109,538$ 108,784$ 101,007$ 66,190$ 60,014$ Comprehensive income 105,555$ 96,838$ 96,163$ 64,241$ 47,323$ KEY FINANACIAL RATIOS Return on average assets 2.36% 2.44% 2.36% 2.10% 2.06% Return on average members' equity 13.09% 13.61% 13.57% 12.72% 12.20% Net interest income as a percentage of average earning assets 3.21% 3.33% 3.32% 3.19% 2.90% Members' equity as a percentage of total assets 17.31% 17.95% 17.10% 16.50% 15.88% Debt to members' equity 4.78:1 4.57:1 4.85:1 5.06:1 5.30:1 Net charge-offs as a percentage of average loans 0.22% 0.14% 0.13% 0.19% 0.00% Allowance for loan losses as a percentage of loans and accrued interest receivable 1.59% 1.48% 1.29% 1.32% 1.04% Permanent capital ratio 15.62% 16.39% 15.81% 15.36% 14.71% Total surplus ratio 15.36% 16.11% 15.53% 15.06% 14.40% Core surplus ratio 15.36% 15.29% 14.70% 14.25% 13.63% Net income distribution Patronage dividends: Cash 40,000$ 35,500$ 35,000$ 23,400$ 13,948$ Allocated surplus -$ -$ -$ -$ 9,052$

* Information presented prior to 2010 includes First Pioneer only. See Note 1 to the Financial Statements for further discussion.

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Management’s Discussion and Analysis

The following commentary is a review of the financial conditionand results of operations of Farm Credit East, ACA (theAssociation) as of December 31, 2012 with comparisons to prioryears. The commentary includes material known trends,commitments, events, or uncertainties that have impacted or arereasonably likely to impact our financial condition and results ofoperations. This commentary should be read in conjunctionwith the accompanying consolidated financial statements andnotes appearing in this Annual Report. Dollar amounts are inthousands unless otherwise noted.

The accompanying financial statements were prepared under theoversight of the Audit Committee.

Business StructureThe Association is an institution of the Farm Credit System,which was created by Congress in 1916 and has servedagricultural producers for over 96 years. The System’s missionis to maintain and improve the income and well-being ofAmerican farmers, ranchers, and producers or harvesters ofaquatic products and farm-related businesses. The Farm CreditSystem is the largest agricultural lending organization in theUnited States. The Farm Credit System is regulated by the FarmCredit Administration (FCA) which is an independent safety andsoundness regulator.

As a cooperative, the Association is owned by the members itserves. The territory served extends across a diverseagricultural region covering the entire states of Connecticut,Massachusetts, Rhode Island and New Jersey, six counties ofNew Hampshire and all of New York except two counties. TheAssociation makes short and intermediate term loans foragricultural production and long term real estate mortgage loans.Our success begins with our extensive agricultural experienceand knowledge of the market.

The Association obtains its funding for its lending andoperations from CoBank, ACB (CoBank). CoBank is acooperative of which Farm Credit East is an owner and member.The Association, along with other Farm Credit System (FCS)entities, also purchases payroll and other human resourceservices from CoBank. The Association is materially affected byCoBank’s financial condition and results of operations. To

obtain a free copy of the CoBank Annual Report toStockholders, please contact us at one of our offices or byaccessing CoBank’s website at www.cobank.com. Farm CreditEast’s Annual and Quarterly reports to stockholders areavailable on the Association’s website, Farmcrediteast.com orcan be obtained free of charge by calling the Association’s mainoffice at 860-741-4390. Annual reports are available 75 days afteryear end and quarterly reports are available 40 days after eachcalendar quarter end.

The Association purchases technology and other operationalservices from Farm Credit Financial Partners, Inc. (FPI), atechnology service corporation. Farm Credit East is an owner inFPI.

Merger2012 was the third year of operation for Farm Credit East. TheAssociation was formed on January 1, 2010, with the merger ofFarm Credit of Western New York, ACA (Western New York) intoFirst Pioneer Farm Credit, ACA (First Pioneer). The mergersuccessfully brought together two excellent organizations andestablished a business entity with greater capacity of capital,people and leadership to serve northeast agriculture. Foradditional information, see Note 1 to these consolidatedfinancial statements “Organization, Business Combination andOperations”.

Year in ReviewIn 2012 the level of uncertainty and downside risk in theeconomy seemed to increase. Political gridlock on taxes andgovernment spending influenced the pace and direction ofeconomic growth. Against this backdrop, Farm Credit Eastregained its growth initiative in both loans and services afterseveral years during which we and our customers were statusquo and internally focused.

As you’ll see in this report, the Association experienced anotheryear of strong financial performance. Our earnings grew to$109.5 million in 2012 with a return on average assets of 2.36%.From its 2012 earnings, the Association declared a $40.0 millioncash patronage dividend which will be distributed in 2013.During the year we also redeemed all of the remaining allocatedretained earnings totaling $34.8 million issued as part of the

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patronage programs in years prior to 2010. This distribution wasin accordance with the Merger Plan and achieved two yearsearly.

The Association grew loan volume 7.8% to total loan volume of$4.7 billion at December 31, 2012. Overall credit quality in ourloan portfolio improved in 2012. Adversely classified loansdecreased to 4.77% of total loans at December 31, 2012,compared to 6.11% at December 31, 2011. High risk assetshowever did increase as nonaccrual loan volume increased to$72.2 million at December 31, 2012 an increase of $23.4 millionfrom 2011. The increase in nonaccrual loan volume was due tocredit concerns in a small number of greenhouse, dairy andtobacco customers.

The Association’s financial position remains strong as ofDecember 31, 2012 reflecting capital levels significantly aboveregulatory minimums. With $842.5 million in members’ equity,our permanent capital and core surplus ratios were 15.62% and15.36% respectively at December 31, 2012, both well in excess ofthe regulatory minimums of 7.00% and 3.50%.

Farm Credit East continues to focus on maintaining a financiallystrong organization with high customer service and value. Whenour customers require capital for their businesses, we are readywith not only the right products and the financial capability todeliver them, but also a highly trained and knowledgeable staffto work with customers.

Agricultural OutlookThe Association has a diverse loan portfolio. The followingreflects the economic conditions for the various keycommodities served by the Association.

Dairy (23.6% of total loan volume): 2012 was a challengingyear for dairy. Milk prices declined by nearly $2.00/cwt from their2011 average in the Northeast, yet expenses escalated, primarilydue to high feed costs. There continued to be a wide range ofoperating results with some producers having a good year, andothers operating at or below breakeven.

Milk prices declined during 2012, with the Boston blend pricingbeginning the year at $19.39/cwt. and dipping as low as $16.58 inJune before recovering. The average price for the year, $18.66was below 2011’s average of $20.64. Analysts predict the price in2013 will average about $2.00/cwt higher.

Exports continued to increase during 2012, leading to a recordtrade surplus in dairy. Demand for improved diets in countriessuch as China and India, supply challenges in other majorexporting nations and the relatively low value of the U.S. dollarare all drivers of increased US exports of dairy protein products.Export markets are expected to remain strong going into 2013.

Challenges in this industry continue to be volatility of netincome, the availability of sufficient labor and the cost/complexity of environmental compliance.

Cash Field (11.1% of total loan volume): This categoryconsists of corn for grain, soybeans, hay and some small grains.In the western region, there are many full-time crop farmers andthe markets for their crops are more diverse, including ethanolfacilities that consume substantial volumes of corn. In NewJersey and in eastern New York, there are some full-timeproducers, but also substantial numbers of part-time and/orsemi-retired farmers growing these crops.

Widespread drought in the Midwest boosted commodity prices.The Northeast was less affected by the drought so many farmershad good crops to sell into a tight market. During 2012, corn andsoybean prices reached record highs, but have since declined.However, given strong export demand, stable biofuelconsumption, and strong demand for livestock feed, cash fieldcrops are expected to remain profitable in 2013. Producersneeding to purchase feed for livestock report shortages andhigh prices for quality hay and silage going into the New Year.

Livestock (9.5% of total loan volume): These borrowers areprimarily part-time farmers with horses or beef cattle in theAssociation’s more suburban areas. Their farm is typically theirhome and also a part-time enterprise. The primary economicinfluence is nonfarm income, not agricultural factors. Theoutlook for this sector is fair for equine, and good for beef andother protein producers. Beef cattle prices were up significantlyin 2012 over 2011. A high commercial slaughter rate combinedwith lower cattle inventories has kept herd sizes low, with herdrebuilding efforts further held back by high grain prices. Higherprices are expected to persist in 2013, but feed will remain costly.

Equine operations are coming off a depressed multi-year period,but the outlook is stable to improving. Racing and breedingfacilities in New York also look forward to a stable to improvingbusiness environment in 2013.

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Timber (9.0% of total loan volume): Timberland investment,lumber production, specialty wood products and structuralpanels are the primary industries within this segment of theportfolio. Wood product prices have started to graduallyincrease, mirroring the nascent recovery in the housing market.Housing starts rose by 28 percent in 2012, but remain at lessthan half their 2006 peak. Markets for sawdust, chips and barkhave been relatively good due to the demand for domestic pulpproduction, wood pellet fuel manufacturing and biomassalternative fuels. Wood pellet prices and demand slid in 2012 butremain stronger than in recent years. Invasive pests, such as theEmerald Ash Borer, and subsequent quarantine zones haveinhibited the movement of logs in the Northeast. The cost oftrucking continues to be a challenge.

Fruit (6.7% of total loan volume): This is a diverse categoryconsisting of apples for fresh market and processing; NewJersey blueberries; Concord and Niagara juice grapes in westernNew York; farm wineries throughout the LSA; and New Jerseypeaches. In terms of volume, most of this fruit enters wholesalechannels, but in terms of value-added, many producers,especially smaller operations outside the major fruit belts rely onretail. The apple harvest was down by 50 percent in New Yorkdue to a spring freeze in 2012, sending prices higher. Retailorchards saw good margins as long as they had fruit to sell.Yields along the Lake Erie grape belt were some of the worst onrecord in 2012. Prices, however, were solid depending upon theindividual co-op or proprietary processor buyer. Wine salesincreased in 2012, but so did supply. The 2013 outlook for theoverall category is primarily dependent on weather. Availabilityof labor, especially for harvest, remains a concern.

Greenhouse (5.6% of total loan volume): 2012 was a slightlybetter year than 2011. Northeast greenhouse earnings aregenerally heavily concentrated in a 7-week window: April 15 thruMay 31. However, last year’s fall and Christmas sales wereimproved over prior years, with mild weather perhaps playing arole. Revenues for wholesale greenhouses in 2012 were typically5 to 10 percent above 2011. Retail greenhouse businesses hadsimilar sales patterns, but more variation in revenues with somereporting sales decreases while others were ahead by 5 to 10percent. Energy and other input costs were stable compared to2011; heating oil was up, but natural gas prices were down.Those who can are converting to natural gas based on apositive long-term outlook for domestic availability. 2013 isexpected to look a lot like 2012 with success dictated by

management ability, strength of markets and weather during thekey sales period.

Farm Services (5.1% of total loan volume): This segmentconsists of diverse agribusinesses that provide services andinputs to farmers. The primary economic drivers are the overallhealth of the farm economy and demand from nonfarmconsumers. Price volatility in fertilizer, chemicals, seed and otherfarm inputs has been difficult and substantially raised thissegment’s risk potential. Equipment dealers report a good year in2012. A strong cash field crop industry has led to farmersinvesting in new equipment.

Nursery (5.0% of total loan volume): Many growers report animproved year in 2012 over 2011, although profitability remains achallenge. Growers are generally reporting a 5 to 10 percentincrease in revenue, but corresponding increases in costs.Primary sales outlets are Big Box retailers and re-wholesalersserving the landscape market. Independent garden centerscontinue to be important, but many of them are struggling in thecurrent economic environment. The industry continues to shiftaway from field production into faster-turning containergrowing. A stable and improving general economic environmentwould provide a catalyst for continual improvement for thissector.

All Other (24.4% of total loan volume): There are 17 otherdiverse loan types, with none accounting for more than 3.9% oftotal loan volume. Numerous factors, about 50% of which can betied to general economic conditions and the remaining 50% toindustry-specific conditions affect this segment of the portfolio.

General EconomyIn much the same way as in 2011, the national economy yieldedmixed results in 2012. The Commerce Department estimates 2012US GDP growth at 2.2 percent, somewhat better than 2011. Whilethe economy is growing, unemployment remained stubbornlyhigh, beginning the year at 8.6 percent and slowly working downto 7.8 percent by November. Again, solid progress, but a far cryfrom the pre-recession levels of 5-6 percent. Of particularconcern is the high number of “discouraged workers” andunderemployed that are not counted in the official rate.

The Federal deficit and debt remain significant political issues.From a long-term standpoint, the US government’s fiscalchallenge has major implications for the future direction of

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interest rates, the value of the US dollar, the ability of the Federalgovernment to meet its obligations and the role of the US in theglobal economy. The US Dollar remains weak against foreigncurrencies, increasing the price of imported goods and energy,but providing a boost to American exports, including agriculturalproducts.

The Federal Reserve has made the unusual commitment not toraise interest rates until at least 2014, keeping the Federal Fundsrate at the near-zero level of 0.25 percent. Subsequently, short-term borrowing rates remain at historical lows. This is reflectiveof both the sluggishness of the recovery, as well as thetremendous political pressure to stimulate the economy. Thisrate translates into a prime rate of 3.25%. Long-term rates forbusiness loans, however, are higher, as there is growing investorsentiment that interest rates will increase down the road.

National housing market conditions are starting to show somesigns of life entering 2013. After years of flat-to-declining prices,the S&P/Case-Shiller home price index trended upwards over thesecond half of the year. New home sales also increased slightly,and housing starts were up 28 percent in 2012, although theyremain at less than half their 2006 peak. The housing market notonly affects overall economic growth, but directly impactsdemand for product from the timber, nursery, greenhouse andsod industries.

Loan PortfolioThe loan portfolio consists primarily of agricultural real estateloans, agricultural production operating loans and intermediateinstallment loans. Loans are originated and serviced within theLocal Service Area (LSA) in New York, New Jersey andthroughout Southern New England, as well as outside the LSAthrough purchased loan participations. The geographicdistribution of loans follows:

Loan volume totaled $4.7 billion at December 31, 2012 anincrease of $340.0 million (7.8%) from $4.4 billion at December 31,2011. The growth was driven by our branch based farm loanportfolio which grew $118.9 million (3.7%) as strong demand foragricultural products benefited our producers. Our residentialcountry living mortgage program grew $78.8 million (24.3%) asreasonably strong demand in our LSA has not been met by otherfinancial institutions. In addition our capital markets group alsogrew $116.0 million (15.5%) to $863.9 million at December 31,2012. Loan volume totaled $4.3 billion at December 31, 2010.

Credit Quality Conditions and Measurements in theLoan PortfolioThe following table presents loans classified, by management,pursuant to our regulator’s Uniform Loan Classification System,as a percent of total loans and related accrued interest.

The overall credit quality in our loan portfolio improved in 2012.Adversely classified loans (‘Substandard’ and ‘Doubtful’)decreased to 4.8% of total loans at December 31, 2012 comparedto 6.1% at December 31, 2011, while ‘Special Mention’ loansdecreased to 3.7% of loans from 4.3%. These improvementsreflect the upgrades in credit quality classification of loans in thetimber and dairy industries combined with the resolution andpayoff of previously adversely classified loans.

Credit risk arises from the inability of an obligor to meet itsrepayment obligation and exists in our outstanding loans,unfunded loan commitments and letters of credit. We managecredit risk associated with our lending activities through anassessment of the credit risk profile of each individual borrowerbased on an analysis of the borrower’s credit history, repaymentcapacity, financial position and collateral. Repayment capacityfocuses on the borrower’s ability to repay the loan based oncash flows from operations or other sources of income. TheAssociation also manages credit risk by establishing singleborrower hold positions and industry concentrations based onunderlying risks. The geographic and commodity diversity inthe loan portfolio, coupled with disciplined underwriting reducesthe potential for significant credit losses. Also worth noting,Farm Credit East’s underwriting standards do not allow for

As of December 31 2012 2011 2010 Acceptable 91.52% 89.59% 86.74% Special mention 3.71 4.30 7.44 Substandard/doubtful 4.77 6.11 5.82 Total 100.00% 100.00% 100.00%

As of December 31 2012 2011 2010 New York 52% 53% 51% New Jersey 14 15 14 Massachusetts 8 8 9 Connecticut 7 7 7 Rhode Island, New Hampshire and other states 19 17 19 Total 100% 100% 100%

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subprime lending which is evident based on the current andhistorical delinquency percentages of the loan portfolio.

To reduce portfolio risk, the Association participates in theUSDA’s Farm Service Agency guarantee program and as ofDecember 31, 2012 has guarantees totaling $300.8 million. TheAssociation also participates in the Farmer Mac Long TermStandby Commitment to Purchase Program. As of December 31,2012, commitments totaling $62.2 million were in this program.

The following table summarizes high risk assets anddelinquency information:

For additional loan type information, see Note 3 to theconsolidated financial statements “Loans and Allowance forLoan Losses”.

Nonearning AssetsNonaccrual loans represent all loans where there is a reasonabledoubt as to collection of principal and/or interest.At December 31, 2012 nonaccrual loans totaled $72.2 million anincrease of $23.5 million from $48.7 million at December 31, 2011.The increase in nonaccruals from 2011 to 2012 was primarily dueto credit concerns in a small number of greenhouse, dairy andtobacco customers offset by net charge-offs related to thosecommodities. Nonaccrual loan volume was $50.6 million atDecember 31, 2010.

Other property owned is comprised of real or personal propertythat has been acquired through foreclosure or deed in lieu offoreclosure. At December 31, 2012 other property owned totaled$2.5 million, a decrease of $0.8 million from $3.3 million atDecember 31, 2011. The decrease from 2011 to 2012 reflectseleven properties disposed of during the year totaling $5.4million which were offset by seven properties acquired totaling$4.7 million and $0.1 million in property write-downs. Otherproperty owned was $2.6 million at December 31, 2010. The

Association is actively marketing all other property ownedassets and intends to dispose of all properties in an orderly andtimely fashion.

While uncertainties continue to exist in the national and somelocal economies, we anticipate credit quality should remainrelatively stable in 2013.

Allowance for Loan LossesAt December 31, 2012 the allowance for loan losses was $75.0million an increase of $10.4 million from $64.6 million at December31, 2011. The allowance for loan losses was $55.4 million atDecember 31, 2010. Net loan charge-offs were $9.6 million for thetwelve months ended December 31, 2012 compared to netcharge-offs of $5.8 million in 2011 and $5.4 in 2010. Theallowance for loan losses at each period end was considered bymanagement to be adequate to absorb probable losses existingin and inherent to the loan portfolio. Management’s evaluationsconsider factors including loan loss experience, portfolio quality,loan portfolio composition, current production conditions andeconomic conditions.

Comparative allowance coverage, as a percentage of key loancategories, follows:

For further discussion regarding the allowance for loan losses,refer to Note 3 to the consolidated financial statements, “Loansand Allowance for Loan Losses”.

Results of OperationsNet income was $109.5 million for the twelve months endingDecember 31, 2012 an increase of $0.7 million (0.6%) from $108.8million for 2011. Net income was $101.0 million for the twelvemonths ending December 31, 2010. The following table reflectskey performance results ($ in millions):

As of December 31 2012 2011 2010 Allowance for loan losses $ 74,954 $ 64,586 $ 55,395 Allowance as a percentage of: Total loans 1.60% 1.48% 1.30% Nonaccrual loans 103.81% 132.56% 109.51% High-risk loans 99.74% 121.67% 103.36%

As of December 31 2012 2011 2010 Nonaccrual $ 72,200 $ 48,722 $ 50,586 Accrual loans 90 Days or more past due 1,374 2,746 3,006 Accrual restructured loans 1,572 1,613 0 Total Impaired Loans $ 75,146 $ 53,081 $ 53,592 Other Property Owned 2,533 3,337 2,609 Total High Risk Assets $ 77,679 $ 56,418 $ 56,201 Impaired Loans to Total Loans 1.60% 1.22% 1.25% High Risk Assets to Total Loans 1.66% 1.30% 1.31% Nonaccrual Loans to Total Loans 1.54% 1.12% 1.18% Delinquencies as a % of total performing loans 0.57% 0.45% 0.37%

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Year ended December 31 2012 2011 2010

Net income $ 109.5

$ 108.8 $ 101.0 Net interest income $ 142.0 $ 141.4 $ 134.4 Net interest margin 3.21% 3.33% 3.32% Return on average assets 2.36% 2.44% 2.36% Return on average members equity 13.09% 13.61% 13.57%

Changes in the significant components impacting the results ofoperations are summarized in the following table ($ in millions):

Net Interest IncomeNet interest income was $142.0 million for the year endedDecember 31, 2012, an increase of $0.6 million (0.5%) from $141.4million for 2011. Net interest income was $134.4 million for thetwelve months ending December 31, 2010. The following tablequantifies the changes in net interest income ($ in millions):

Increase (decrease) due to:

2012 versus

2011

2011 versus

2010 Increase in net interest income $ 0.6 $ 7.0 (Increase) Decrease in provision for loan losses (5.0) 5.0 Increase (Decrease) in noninterest income 8.7 (2.5) (Increase) in noninterest expenses (3.6) (1.8) Decrease (Increase) in provision for income taxes 0.0 0.1 Total increase in net income $ 0.7 $ 7.8

During 2012, branch based farm loans in our LSA was theprimary driver of net interest income. Both debt and equityinvestments in earning assets grew during 2012. Interest incomeas a percent of earning assets was 4.18% in 2012, down from4.31% in 2011. Average cost of debt funding also fell from 1.42%in 2011 to 1.29% in 2012. The decline in yields from 2011 was dueto lower fixed rates. Average interest rate spread over cost offunding was stable at 2.89% year over year. Of the $0.6 millionincrease from 2011, $3.9 million was due to increased debtfunded loan volume. Collection of nonaccrual other interestdeclined by $3.6 million from 2011, due to a large recovery in2011. $0.7 million of variance was due to increased equityinvestment in loans and stable return on equity position. The

Association’s hedging strategy also contributed $1.1 million tonet interest income, a $0.4 million reduction from 2011.

In 2011, the increase in net interest income over 2010 was due toa combination of growth, recovery of nonaccrual interest, andreturns on our equity position.

Information regarding the average daily balances and averagerates earned and paid on our portfolio are presented in thefollowing table:

Provision for loan lossesThe Association recognized a provision for loan losses of $20.0million for the twelve months ended December 31, 2012 ascompared with a provision for loan losses of $15.0 million in2011. The provision for loan losses reflects our expenseestimate for losses inherent in our loan portfolio, includingunfunded commitments. We maintain an allowance for creditexposure for probable and estimable losses based on factorsdiscussed in Note 2 to the consolidate financial statements“Summary of Significant Accounting Policies”. The provisionfor loan losses was $20.0 million for the twelve months endingDecember 31, 2010.

Noninterest incomeNoninterest income increased $8.7 million (21.5%) to $49.0million for the twelve months ended December 31, 2012 ascompared to $40.3 million in 2011. Included in 2012 noninterestincome was the $5.2 million in refunds received for a portion ofFarm Credit Insurance Fund premiums paid in prior years whichdid not occur in 2011. Without this non-recurring item,noninterest income increased by $3.5 million (8.7%). Noninterestincome totaled $42.7 million for the twelve months ending

Changes in net interest income due to:

2012 versus 2011

2011 versus 2010

Changes in volume $ 3.9 $ 3.8 Changes in nonaccrual and other income (3.6) 2.4 Changes in rates and margin 0.7 2.1 Hedging activity (0.4) (1.3) Net change $ 0.6 $ 7.0

As of December 31 2012 2011 2010

Net interest income $ 142,038 $ 141,396 $ 134,427

Average balances:

Average interest earning loans $ 4,421,576 $ 4,249,627 $ 4,045,030

Average interest bearing liabilities $ 3,759,613 $ 3,627,208 $ 3,498,777

Average yields and rates:

Interest earning loan yield 4.18% 4.31% 4.46%

Rate paid on interest bearing liabilities 1.29% 1.42% 1.55%

Interest rate spread 2.89% 2.89% 2.91%

Net interest margin (interest income as a percentage of average earning loans) 3.21% 3.33% 3.32%

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December 31, 2010 and included a refund of $4.4 million from theFarm Credit System Insurance Corporation.

Patronage income from CoBank is a significant part of theAssociation’s noninterest income. Patronage income is basedon the average balance of the Association’s note payable toCoBank. For the year ended December 31, 2012, CoBankpatronage income totaled $17.0 million an increase of $0.7 millionfrom $16.3 million in 2011. The increase in patronage income is aresult of growth in CoBank earnings and the increase inAssociation’s borrowings. The patronage rates paid by CoBankon the Association’s note payable were 45 basis points in 2012,2011 and 2010. Patronage income from CoBank was $15.7 millionfor the twelve months ending December 31, 2010.

The Association also receives patronage income from CoBankand other Farm Credit entities that purchased interests in loansoriginated by the Association. For the twelve months endedDecember 31, 2012, this revenue totaled $2.2 million compared to$2.0 million in 2011 and $1.7 million in 2010.

Noninterest income also includes fees for financial services, loanfees, compensation on participation loans and other noninterestincome. These noninterest income sources totaled $24.6 millionfor the twelve months ending December 31, 2012 an increase of$2.5 million (11.5%) compared to 2011. Financial services feeincome is the largest component with $18.6 million in revenue forthe year ended December 31, 2012 an increase of $2.1 million(12.5%) compared to 2011. Our continued marketing efforts forfinancially related services have resulted in more customersutiilzing our farm records, business consulting, appraisal and taxservices. These other noninterest income items were $20.9million for the twelve months ending December 31, 2010.

Noninterest expenseNoninterest expense totaled $60.9 million for the twelve monthsending December 31, 2012 an increase of $3.6 million (6.2%) from$57.3 million in 2011. Noninterest expense was $55.5 million forthe twelve months ending December 31, 2010.

Salaries and employee benefits is the primary component ofnoninterest expense and totaled $40.6 million for the twelvemonths ended December 31, 2012 an increase of $3.8 million from$36.8 million for the twelve months ending December 31, 2011.The increase is primarily a result of higher retirement planexpenses ($1.6 million) combined with annual merit and incentive

compensation increases and slightly higher staffing levels.Salary and employee benefits were $36.2 million for the twelvemonths ending December 31, 2010.

Fees paid to FPI, the Association’s technology service provider,were $5.2 million for the twelve months ended December 31,2012, a decrease of $480 thousand from the twelve monthsended December 31, 2011. Insurance fund premiums were $1.7million for the twelve months ended December 31, 2012, adecrease of $0.3 million (12.5%) compared to 2011. Noninterestexpenses also include occupancy and equipment expense, otheroperating expenses and other property owned expenses.

Income TaxesThe provision for income taxes was unchanged from $0.6 millionin 2012 unchanged from 2011. Our effective tax rate issignificantly less than the applicable federal and state taxstatutory income tax rates primarily due to tax deductiblepatronage distributions and our tax exempt business activities.For the twelve months ending December 31, 2010 the provisionfor income taxes was $0.7 million. For additional information, seeNote 9 “Income Taxes” to the consolidated financial statements.

Patronage DistributionsThe Association has a patronage program that allows it todistribute its available net earnings to its stockholders. Thepatronage program consists of a qualified cash distribution anda non-qualified distribution. This program provides for theapplication of net earnings in the manner described in ourBylaws. When determining the amount and method ofpatronage to be distributed, the Board considers the settingaside of funds to increase retained earnings to meet capitaladequacy standards established by Farm Credit regulations, tomeet our internal capital adequacy standards to supportcompetitive pricing at targeted earnings levels, and forreasonable reserves. Patronage is distributed in accordancewith cooperative principles, as determined by the Board and inaccordance with Association by-laws. The distributions aresent to eligible customers shortly after the end of the year. Forthe year ended December 31, 2012, the Association declared a$40.0 million qualified patronage refund which will be distributed100% cash in 2013. For the years ended December 31, 2011 and2010, the Association declared a $35.5 million and $35.0 million inqualified patronage refunds respectively which were distributed100% in cash in February of the following year.

Page 24: 2012 Farm Credit East Annual Report

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FARM CREDIT EAST | 2012 ANNUAL REPORT

Liquidity and Funding SourcesThe Association’s primary source of funding is CoBank. Fundsare obtained through borrowing on a revolving line of creditgoverned by a General Financing Agreement. At December 31,2012, the Association’s notes payable to CoBank totaled $4.0billion which is a $0.4 billion increase from $3.6 billion atDecember 31, 2011. The Association’s note payable was $3.6billion at December 31, 2010.

The line of credit available to the Association is formula-drivenbased on Association loan volume and credit quality. Because ofthe funding relationship with CoBank, the Association does notmaintain large balances in cash or other liquid investments.Substantially all of the Association’s assets are pledged assecurity to CoBank. The Association is in full compliance withits financing agreement with CoBank and has capacity under theagreement to borrow funds needed to meet anticipated loandemand.

The Association minimizes its interest rate risk by funding loanswith debt from CoBank that has similar pricing characteristics asthe assets being funded. As a result, the Association is notsubject to substantial interest rate risk. The Association’s loanportfolio consisted of the following breakdown by pricing type:

As of December 31 2012 2011 2010 Pricing Type: Variable rate loans 61.37% 62.64% 63.00% Indexed loans (Prime, ARM, LIBOR) 9.82% 10.40% 10.09% Fixed rate loans 28.81% 26.96% 26.91%

The interest rates charged to the Association on debt, by andlarge, have the same pricing characteristics as the loans funded.For example, fixed rate loans are funded with fixed rate debt withthe same term. The Association’s goal is to fund fixed andindexed rate loans with 100% matching debt.

The Association’s equity is invested in variable rate loans. Theyield on equity funded loans is the average variable portfoliorate. As rates rise or fall, earnings on equity funded loans go upand down. The Association also uses interest rate contracts(swaps) with CoBank to better manage its equity investment invariable rate loans. When rates are low, the Association earnsmore on its interest rate contracts, offsetting lower earnings onits equity position and serving to stabilize net interest income.(Conversely, when rates rise, the Association will earn less on its

contracts and more on its equity position). The average lengthof the Association’s contracts is about 12 months. The effect ofthis hedging strategy diminishes if rates stay stable for two ormore years.

The swaps also extend the duration of the Association’s equityposition resulting in increased earnings from the normal yieldcurve and some change in the value of equity due to changes ininterest rates. The Association’s interest rate hedging programis summarized in the following table ($ in millions):

For additional information, see Note 13 to the consolidatedfinancial statements “Fair Value Measurements”.

Members’ EquityIn conjunction with its annual financial planning process, theAssociation’s Board of Directors reviews and approves aCapitalization Plan. The objective of the plan is to build andmaintain adequate capital for continued financial viability and toprovide for growth necessary to meet customer needs.

Total members’ equity totaled $842.5 million at December 31,2012 an increase of $31.1 million (3.8%) from $811.4 million atDecember 31, 2011. Members’ equity at December 31, 2012 wascomprised of unallocated surplus of $702.2 million, additionalpaid-in capital of $164.4 million, customer capital stock andparticipation certificates of $12.6 million and accumulated othercomprehensive loss of <$36.7> million.

In May of 2012 the Association redeemed all of the remainingallocated retained earnings totaling $34.8 million issued as partof the patronage programs in years prior to 2010. Thisdistribution was in accordance with the merger plan andachieved two years early.

The Association, along with other System institutions, is subjectto regulatory oversight by FCA. In addition to theAssociation’s Board approved Capitalization Plan, a number ofrules and regulations are imposed under the Farm Credit Act onthe operations of System entities, including requirements tomaintain a minimum permanent capital ratio, total surplus ratioand core surplus ratio. As displayed in the following table, the

As of December 31 2012 2011 2010

Swap notional amount $ 400.0 $ 340.0 $ 280.0 Value $ 0.5 $ (0.2) $ 1.1 Cash Settlements $ 0.6 $ 1.8 $ 3.3

Page 25: 2012 Farm Credit East Annual Report

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FARM CREDIT EAST | 2012 ANNUAL REPORT

As of December 31 2012 2011 2010 Members’ equity as a % of assets 17.31% 17.95% 17.10% Permanent capital ratio (7.0%) 15.62% 16.39% 15.81% Total surplus ratio (7.0%) 15.36% 16.11% 15.53% Core surplus ratio (3.5%) 15.36% 15.29% 14.70%

Financial condition ratios for 2012 are consistent with theAssociation’s current Capitalization Plan and long termobjectives. For a description of the Association’s capitalizationrequirements, equities and regulatory capitalization requirementsand restrictions, see Note 7 to the consolidated financialstatements, “Members’ Equity”. Association managementknows of no reason that would cause the Association not tomeet these standards in the foreseeable future.

Critical Accounting EstimatesManagement’s discussion and analysis of the financial conditionand results of operations are based on the Association’sconsolidated financial statements, which we prepare inaccordance with accounting principles generally accepted in theUnited States of America. In preparing these financialstatements, we make estimates and assumptions. Our financialposition and results of operations are affected by these estimatesand assumptions, which are integral to understanding reportedresults.

Note 2 to the accompanying consolidated financial statementscontains a summary of our significant accounting policies. Weconsider certain of these policies to be critical to the presentationof our financial condition, as they require us to make complex orsubjective judgments that affect the value of certain assets andliabilities. Some of these estimates relate to matters that areinherently uncertain. Most accounting policies are not, however,considered critical. Our critical accounting policies relate todetermining the level of our allowance for loan losses and thevaluation of our derivative instruments with no ready markets.

Forward-Looking StatementsCertain information included in this report contains forward-looking statements. These statements are not guarantees offuture performance and involve certain risks, uncertainties andassumptions that are difficult to predict. Words such as“believes,” “could,” “estimates,” “anticipates,” “may,” “should,”“will,” or other variations of these terms or similar expressions areintended to identify forward-looking statements. Thesestatements are based on assumptions and analyses made in lightof experience, historical trends, current conditions, and expectedfuture developments. However, actual results and developmentsmay differ materially from our expectations and predictions due toa number of risks and uncertainties, many of which are beyondour control. These risks and uncertainties include, but are notlimited to fluctuations in the economy, the relative strengths andweaknesses in the agricultural credit sectors and in the real estatemarket, and the actions taken by the Federal Reserve inimplementing monetary policy.

Association exceeded the minimum regulatory requirements,which are noted parenthetically.

Page 26: 2012 Farm Credit East Annual Report

11

FARM CREDIT EAST | 2012 ANNUAL REPORT

Report of Management

March 5, 2013

The consolidated financial statements of Farm Credit East, ACA (the Association) are prepared by management, which is responsiblefor their integrity and objectivity, including amounts that must necessarily be based on judgments and estimates. The consolidatedfinancial statements have been prepared in conformity with accounting principles generally accepted in the United States of Americaas appropriate in the circumstances. The consolidated financial statements, in the opinion of management, fairly present the financialposition of the Association. Other financial information included in this Annual Report is consistent with that in the consolidatedfinancial statements.

To meet its responsibility for reliable financial information, management depends on the Association’s accounting and internal controlsystems which have been designed to provide reasonable, but not absolute, assurance that assets are safeguarded and transactionsare properly authorized and recorded. The systems have been designed to recognize that the cost must be related to the benefitsderived. To monitor compliance, the Association’s internal auditors and risk management staff perform audits of the accountingrecords, review accounting systems and internal controls and recommend improvements as appropriate. The consolidated financialstatements are audited by PricewaterhouseCoopers LLP, our independent auditors, who also conduct a review of internal controls tothe extent necessary to comply with auditing standards generally accepted in the United States of America. The Association is alsoexamined by the Farm Credit Administration.

The chief executive officer, as delegated by the Board of Directors, has overall responsibility for the Association’s system of internalcontrols and financial reporting, subject to the review of the Audit Committee of the Board of Directors. The Audit Committeeconsults regularly with management and meets periodically with the independent auditors and internal auditors to review the scopeand results of their examinations. The Audit Committee reports regularly to the Board of Directors. Both the independent auditorsand the internal auditors have direct access to the Audit Committee.

The undersigned certify the 2012 Farm Credit East Annual Report to Stockholders has been reviewed and prepared in accordance withall applicable statutory or regulatory requirements and that the information contained herein is true, accurate, and complete to thebest of our knowledge and belief.

William J. Lipinski CEO

Andrew J. Gilbert Chairman of the Board

Charles S. Herring President and Chief Operating Officer

Paul S. Bajgier Senior Vice President and Treasurer

Page 27: 2012 Farm Credit East Annual Report

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FARM CREDIT EAST | 2012 ANNUAL REPORT

Report of Audit Committee

March 5, 2013

Benjamin J. FreundChairman of the Audit CommitteeFarm Credit East, ACA

Other Committee Members:June W. HoeflichAnn P. Hudson, CPAHenry L. HuntingtonRichard Pl Janiga

The consolidated financial statements were prepared under the oversight of the Audit Committee (the Committee). The Committee iscomposed of five members from the Farm Credit East, ACA (the Association) Board of Directors. In 2012, the Committee met fivetimes in person and participated in several conference calls. The Committee oversees the scope of the Association’s internal auditprogram, the independence of the outside auditors, the adequacy of the Association’s system of internal controls and procedures,and the adequacy of management’s action with respect to recommendations arising from those auditing activities. The Committee’sresponsibilities are described more fully in the Association’s Internal Control Policy and the Audit Committee Scope of Responsibility.In addition, the Committee approved the appointment of PricewaterhouseCoopers LLP (PwC) as our independent auditors for 2012.

Management is responsible for the Association’s internal controls and the preparation of the consolidated financial statements inaccordance with accounting principles generally accepted in the United States of America. PwC is responsible for performing anindependent audit of the Association’s consolidated financial statements in accordance with generally accepted auditing standards inthe United States of America and to issue a report thereon. The Committee’s responsibilities include monitoring and overseeing theseprocesses.

In this context, the Committee reviewed and discussed the audited consolidated financial statements for the year ended December 31,2012, with management. The Committee also reviewed with PwC the matters required to be discussed by Statement of AuditingStandards No. 114 The Auditor’s Communication With Those Charged With Governance. Both PwC and the Association’s internalauditors directly provide reports on significant matters to the Committee.

The Committee had discussions with and received written disclosures from PwC in accordance with Independence Standards BoardStandard No. 1 Independence Discussion with Audit Committees, and discussed with PwC its independence. The Committeeapproves all non-audit services provided by PwC. In 2012 PwC was engaged for tax services and the Committee concluded theseservices were not incompatible with maintaining the auditors’ independence. The Committee has discussed with management andPwC such other matters and received such assurances from them as the Committee deemed appropriate.

Based on the foregoing review and discussions, and relying thereon, the Committee recommended that the Board of Directors includethe audited consolidated financial statements in the Annual Report for the year ended December 31, 2012.

Page 28: 2012 Farm Credit East Annual Report

13

FARM CREDIT EAST | 2012 ANNUAL REPORT

Report on Internal Control over Financial Reporting

March 5, 2013

The Association’s principal executives and principal financial officers, or persons performing similar functions, are responsible forestablishing and maintaining adequate internal control over financial reporting for the Association’s combined financial statements.For purposes of this report, “internal control over financial reporting” is defined as a process designed by, or under the supervisionof the Association’s principal executives and principal financial officers, or persons performing similar functions, and effected by itsboards of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reportinginformation and the preparation of the combined financial statements for external purposes in accordance with accounting principlesgenerally accepted in the United States of America and includes those policies and procedures that: (1) pertain to the maintenance ofrecords that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Association, (2)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial information in accordancewith accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made onlyin accordance with authorizations of management and directors of the Association, and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or disposition of the Association’s assets that could have a materialeffect on its combined financial statements.

The Association’s management has completed an assessment of the effectiveness of internal control over financial reporting as ofDecember 31, 2012. In making the assessment, management used the framework in Internal Control — Integrated Framework,promulgated by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as the “COSO”criteria.

Based on the assessment performed, the Association concluded that as of December 31, 2012, the internal control over financialreporting was effective based upon the COSO criteria. Additionally, based on this assessment, the Association determined that therewere no material weaknesses in the internal control over financial reporting as of December 31, 2012.

William J. Lipinski CEO

Paul S. Bajgier Senior Vice President and Treasurer

James D. Miller Senior Vice President of Finance

Page 29: 2012 Farm Credit East Annual Report

To the Board of Directors and Stockholders

of Farm Credit East, ACA

We have audited the accompanying consolidated financial statements of Farm Credit East,

which comprise the consolidated balance sheets as of December 31, 2012, 2011 and 2010, and the related consolidated statements of

comprehensive income, changes in members' equity and cash flows for the years t

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance wi

accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of

internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from ma

misstatement, whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our a

accordance with auditing standards generally accepted in the United States

perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material

misstatement.

An audit involves performing procedures to obtain audit evidence about

statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement o

consolidated financial statements, whether due to fraud or error.

relevant to the Association’s preparation and fair presentation of the consolidated financial statements in order to design a

procedures that are appropriate in the circumstances, but not f

Association’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriaten

accounting policies used and the reasonableness of signi

overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is suffic

appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financi

Farm Credit East, ACA and its subsidiaries at December 31, 2012, 2011 and 2010, and the results of it

the years then ended in accordance with accounting principles generally accepted in the United States

Other Matter

As disclosed in Note 1 to the consolidated financial statements, the Association merged with

January 1, 2010.

March 5, 2013

PricewaterhouseCoopers LLP, 185 Asylum Street, Suite 2400, Hartford, CT 06103T: (860) 241 7000, F: (860) 241 7458, www.pwc.com/us

Independent Auditor's Report

We have audited the accompanying consolidated financial statements of Farm Credit East, ACA and its subsidiaries (the "Association"),

as of December 31, 2012, 2011 and 2010, and the related consolidated statements of

comprehensive income, changes in members' equity and cash flows for the years then ended.

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance wi

e United States of America; this includes the design, implementation, and maintenance of

internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from ma

Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our a

accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and

perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial

statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement o

consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control

relevant to the Association’s preparation and fair presentation of the consolidated financial statements in order to design a

procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the

Association’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriaten

accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the

overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is suffic

nion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financi

Farm Credit East, ACA and its subsidiaries at December 31, 2012, 2011 and 2010, and the results of its operations and its cash flows for

the years then ended in accordance with accounting principles generally accepted in the United States of America

As disclosed in Note 1 to the consolidated financial statements, the Association merged with Farm Credit of Western New York, ACA on

PricewaterhouseCoopers LLP, 185 Asylum Street, Suite 2400, Hartford, CT 06103T: (860) 241 7000, F: (860) 241 7458, www.pwc.com/us

ACA and its subsidiaries (the "Association"),

as of December 31, 2012, 2011 and 2010, and the related consolidated statements of

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with

e United States of America; this includes the design, implementation, and maintenance of

internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material

Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in

. Those standards require that we plan and

perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material

the amounts and disclosures in the consolidated financial

statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the

In making those risk assessments, we consider internal control

relevant to the Association’s preparation and fair presentation of the consolidated financial statements in order to design audit

or the purpose of expressing an opinion on the effectiveness of the

Association’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of

ficant accounting estimates made by management, as well as evaluating the

overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of

s operations and its cash flows for

of America.

of Western New York, ACA on

14

FARM CREDIT EAST | 2012 ANNUAL REPORT

Report of Independent Auditors

Page 30: 2012 Farm Credit East Annual Report

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FARM CREDIT EAST | 2012 ANNUAL REPORT

Consolidated Balance Sheet

As of December 31 (dollars in thousands) 2012 2011 2010ASSETSLoans 4,692,668$ 4,352,586$ 4,275,104$ Less: Allowance for loan losses 74,954 64,586 55,395 Net loans 4,617,714 4,288,000 4,219,709Cash 25,332 13,592 12,493Accrued interest receivable 14,919 14,918 14,963Investment in CoBank, ACB 156,938 149,828 144,139Investment in Rural Investments, LLC 3,442 4,189 6,385Premises and equipment, net 15,499 16,582 17,564Other property owned 2,533 3,337 2,609Other assets 31,914 29,230 29,306 Total Assets 4,868,291$ 4,519,676$ 4,447,168$ LIABILITIESNotes payable to CoBank, ACB 3,956,600$ 3,645,745$ 3,633,787$ Patronage distributions payable 40,000 35,500 35,000Other liabilities 29,201 27,010 17,925 Total Liabilities 4,025,801 3,708,255 3,686,712MEMBERS' EQUITYCapital stock and participation certificates 12,602 12,242 11,962Additional paid-in capital 164,369 164,369 164,369Allocated retained earnings 0 34,846 45,488Unallocated retained earnings 702,235 632,697 559,424Accumulated other comprehensive loss (36,716) (32,733) (20,787) Total Members' Equity 842,490 811,421 760,456 Total Liabilities and Members' Equity 4,868,291$ 4,519,676$ 4,447,168$

The accompanying notes are an integral part of these statements.

Page 31: 2012 Farm Credit East Annual Report

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FARM CREDIT EAST | 2012 ANNUAL REPORT

Consolidated Statement of Comprehensive Income

Year Ended December 31 (dollars in thousands) 2012 2011 2010INTEREST INCOMELoans 187,447$ 185,350$ 183,839$ Other 1,137 5,270 1,292 Total interest income 188,584 190,620 185,131INTEREST EXPENSENotes payable to CoBank, ACB 46,542 49,219 50,688Other 4 5 16 Total interest expense 46,546 49,224 50,704Net interest income 142,038 141,396 134,427Provision for loan losses 20,000 15,000 20,000Net interest income after provision for loan losses 122,038 126,396 114,427NONINTEREST INCOMEPatronage distributions from Farm Credit Institutions 19,214 18,225 17,409Financially related services income 18,552 16,491 15,402Refunds from Farm Credit System Insurance Corporation 5,185 0 4,422Compensation on participation loans, net 3,783 4,169 3,315Loan fees 2,268 1,430 2,176Other income 42 16 20 Total noninterest income 49,044 40,331 42,744NONINTEREST EXPENSESalaries and employee benefits 40,569 36,758 36,205Occupancy and equipment 2,746 2,802 2,647Insurance Fund premiums 1,723 1,970 1,585Fees paid to technology service provider 5,236 5,284 5,288Other operating expenses 10,232 10,172 9,670Other property owned expenses, net 399 329 76 Total noninterest expenses 60,905 57,315 55,471Income before income taxes 110,177 109,412 101,700Provision for income taxes 639 628 693 Net Income 109,538 108,784 101,007 OTHER COMPREHENSIVE INCOME (LOSS)Net change in retirement plan liabilities (4,254) (10,936) (4,517)Net change in cash flow hedge 271 (1,010) (327)Other Comprehensive Income (Loss) (3,983) (11,946) (4,844) Comprehensive Income 105,555$ 96,838$ 96,163$

The accompanying notes are an integral part of these statements.

Page 32: 2012 Farm Credit East Annual Report

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FARM CREDIT EAST | 2012 ANNUAL REPORT

Consolidated Statement of Changes in Members’ Equity

(dollars in thousands)

Capital Stock and

Participation Certificates

Additional Paid-in-Capital

Allocated Retained Earnings

Unallocated Retained Earnings

Accumulated Other

Comprehensive Income/(Loss)

Total Members'

EquityBalance at December 31, 2009 8,850$ -$ 41,528$ 493,417$ (15,943)$ 527,852$ Comprehensive Income 101,007 (4,844) 96,163 Capital stock and participation certificates issued 977 977 Capital stock and participation certificates retired (767) (767) Equity re-characterized upon merger 2,902 164,369 14,000 181,271 Allocated retained earnings retired (10,040) (10,040) Patronage Distribution (35,000) (35,000) Balance at December 31, 2010 11,962$ 164,369$ 45,488$ 559,424$ (20,787)$ 760,456$ Comprehensive Income 108,784 (11,946) 96,838 Capital stock and participation certificates issued 1,216 1,216 Capital stock and participation certificates retired (936) (936) Allocated retained earnings retired (10,642) (10,642) Patronage Distribution (35,511) (35,511) Balance at December 31, 2011 12,242$ 164,369$ 34,846$ 632,697$ (32,733)$ 811,421$ Comprehensive Income 109,538 (3,983) 105,555 Capital stock and participation certificates issued 1,231 1,231 Capital stock and participation certificates retired (871) (871) Allocated retained earnings retired (34,846) (34,846) Patronage Distribution (40,000) (40,000) Balance at December 31, 2012 12,602$ 164,369$ -$ 702,235$ (36,716)$ 842,490$

The accompanying notes are an integral part of these statements.

Page 33: 2012 Farm Credit East Annual Report

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FARM CREDIT EAST | 2012 ANNUAL REPORT

Consolidated Statement of Cash Flows

Year Ended December 31 (dollars in thousands) 2012 2011 2010CASH FLOWS FROM OPERATING ACTIVITIES: Net income 109,538$ 108,784$ 101,007$ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,279 2,122 1,785 Provision for loan losses 20,000 15,000 20,000 (Increase) in accrued interest receivable (594) (441) (477) Decrease in other liabilities (1,792) (2,861) (10,601) (Increase) decrease in other assets (2,563) 193 (275) (Gain) loss from sales of other property owned (145) 9 (6) (Gain) loss from sales of premises and equipment (118) (33) 7 Total adjustments 17,067 13,989 10,433

Net cash provided by operating activities 126,605 122,773 111,440CASH FLOWS FROM INVESTING ACTIVITIES: Increase in loans, net (355,139) (89,384) (206,809) Increase in investment in CoBank (7,110) (5,689) (1,852) Decrease in investments 626 2,080 1,290 Expenditures for premises and equipment (1,640) (1,261) (2,325) Proceeds from sales of other property owned 6,967 5,842 722 Proceeds from sales of premises and equipment 562 154 116 Net cash acquired in business combination 0 0 4,006

Net cash used in investing activities (355,734) (88,258) (204,852)CASH FLOWS FROM FINANCING ACTIVITIES: Advances on notes payable under financing agreement with CoBank, ACB 3,682,809 3,483,783 3,667,196 Repayment of notes payable to CoBank, ACB (3,371,954) (3,471,825) (3,525,049) Capital stock and participation certificates issued 1,231 1,216 977 Capital stock and participation certificates retired (871) (936) (767) Patronage distributions paid (70,346) (45,654) (41,841)

Net cash (used in) provided by financing activities 240,869 (33,416) 100,516

Net increase (decrease) in cash and cash equivalents 11,740 1,099 7,104

Cash and cash equivalents at beginning of year 13,592 12,493 5,389

Cash and cash equivalents at end of year 25,332$ 13,592$ 12,493$ SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES: Accrued interest transferred to loans 593$ 486$ 551$ Loans transferred to other property owned 6,018 6,579 3,058 Cash patronage distribution declared 40,000 35,500 35,000 Transfer of surplus to additional paid-in-capital 0 0 164,369

The accompanying notes are an integral part of these statements.

Page 34: 2012 Farm Credit East Annual Report

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FARM CREDIT EAST | 2012 ANNUAL REPORT

Notes to Consolidated Financial Statements(dollars in thousands except as noted)

NOTE 1 – Organization, Business Combination andOperations

OrganizationFarm Credit East, ACA, an Agricultural Credit Association(ACA) and its subsidiaries, Farm Credit East FLCA, a FederalLand Credit Association (FLCA), and Farm Credit East PCA, aProduction Credit Association (PCA), (collectively called “theAssociation”), is a member-owned cooperative which providescredit and financially related services to or for the benefit ofeligible borrowers/stockholders for qualified agriculturalpurposes in the counties of Belknap, Carroll, Hillsborough,Merrimack, Rockingham, and Strafford in the State of NewHampshire; all counties in the State of New York except Clintonand Essex, and in the States of Connecticut, Massachusetts,Rhode Island and New Jersey.

The Association is a lending institution of the Farm CreditSystem (the System), a nationwide system of cooperativelyowned Banks and Associations, which was established by Actsof Congress to meet the credit needs of American agricultureand is subject to the provisions of the Farm Credit Act of 1971,as amended (the Farm Credit Act).

At December 31, 2012, the System was comprised of three FarmCredit Banks (FCBs) and one Agricultural Credit Bank (ACB)and 82 affiliated Associations. CoBank, ACB (CoBank or ACB)is Farm Credit East’s funding bank.

CoBank and its related Associations are collectively referred toas the “District”. CoBank provides funding to all associationswithin the District and is responsible for supervising certainactivities of the District Associations. The District consists ofthe Bank, twenty seven ACA’s and two FLCA’s. The FLCAs’make secured long-term agricultural real estate and rural homemortgage loans. The ACAs’ make short and intermediate-termloans for agricultural production or operating purposes and canalso make secured long-term agricultural real estate and ruralhome mortgage loans.

The Association, along with other System Institutions, ownsFarm Credit Financial Partners, Inc. (FPI) which providestechnology and other operational services to its owners.

The Farm Credit Administration (FCA) is delegated authority byCongress to regulate the System Banks and Associations. The

FCA examines the activities of System Associations to ensuretheir compliance with the Farm Credit Act, FCA regulations andsafe and sound banking practices.

The Farm Credit Act established the Farm Credit SystemInsurance Corporation (Insurance Corporation) to administer theFarm Credit Insurance Fund (Insurance Fund). The InsuranceFund is required to be used (1) to insure the timely payment ofprincipal and interest on Systemwide debt obligations (insureddebt), (2) to ensure the retirement of protected borrower capitalat par or stated value, and (3) for other specified purposes. TheInsurance Fund is also available for the discretionary uses bythe Insurance Corporation of providing assistance to certaintroubled System institutions and to cover the operatingexpenses of the Insurance Corporation. Each System Bank hasbeen required to pay premiums, which may be passed onto theAssociations, into the Insurance Fund, based on its annualaverage adjusted outstanding insured debt until the monies inthe Insurance Fund reach the “secure base amount,” which isdefined in the Farm Credit Act as 2.0% of the aggregate insuredobligations (adjusted to reflect the reduced risk on loans orinvestments guaranteed by federal or state governments) orsuch other percentage of the aggregate obligations as theInsurance Corporation in its sole discretion determines to beactuarially sound. When the amount in the Insurance Fundexceeds the secure base amount, the Insurance Corporation isrequired to reduce premiums, as necessary to maintain theInsurance Fund at the 2% level. As required by the Farm CreditAct, as amended, the Insurance Corporation may return excessfunds above the secure base amount to System institutions.

Business CombinationEffective January 1, 2010, Farm Credit of Western New York,ACA (Western New York) merged into First Pioneer Farm Credit,ACA (First Pioneer). The merged association operates under thename of Farm Credit East. As the accounting acquirer, FirstPioneer accounted for the transaction under the acquisitionmethod of accounting in accordance with the FASB AccountingStandards Codification (ASC) 805 Business Combinations (ASC805). As the accounting acquirer, First Pioneer recognized theidentifiable assets acquired and liabilities assumed in the Mergeras of January 1, 2010 at their respective fair values. The fairvalues were measured based on various estimates usingassumptions that First Pioneer management believed arereasonable utilizing information currently available.

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As cooperative organizations, Farm Credit associations operatefor the mutual benefit of our customer owners and othercustomers and not for the benefit of any other equity investors;capital stock provides no significant interest in corporateearnings or growth. Specifically, due to restrictions in applicableregulations and their bylaws, the Associations can issue stockonly at its par value of $5 per share, the stock is not tradable,and the stock can be retired only for the lesser of par value orbook value. In these and other respects, the shares of stock inone Association that were converted to shares of anotherAssociation had identical rights and attributes. For this reason,the conversion of stock pursuant to the merger occurred at aone-for-one exchange ratio.

Management believes that because the stock in eachAssociation is fixed in value, the stock issued pursuant to themerger provides no basis for estimating the fair value of theconsideration transferred pursuant to the merger. In the absenceof a purchase price determination, the First Pioneer identifiedand estimated the acquisition date fair value of the equityinterests of the acquired Association instead of the acquisitiondate fair value of the equity interests transferred asconsideration. The fair value of the assets acquired, includingspecific intangible assets and liabilities assumed, were measuredbased on various estimates using assumptions that managementbelieves are reasonable utilizing information currently available.The use of different estimates and judgments could yieldmaterially different results.

This evaluation produced a fair value of identifiable assetsacquired and liabilities assumed that was substantially equal tothe fair value of the member interests transferred in the merger.As a result, management recorded no goodwill. The excessvalue received, by the acquiring Association from the acquiredAssociation, over the par value of capital stock and participationcertificates issued in the merger is considered to be additionalpaid-in capital.

The opening balance sheet below shows the fair value of theacquired assets and assumed liabilities as of January 1, 2010.

The fair value of the impaired loans acquired as of January 1,2010 was $6.3 million and the gross amount of these impairedloans was $13.3 million. The fair value of these impaired loanswas $2.5 million at December 31, 2010, $1.6 million at December31, 2011 and $1.0 million at December 31, 2012 while the grossamount of these impaired loans was $3.9 million at December 31,2010, $3.0 million at December 31, 2011 and $1.0 million atDecember 31, 2012. The amount of accretable yield relating to allloans acquired was $2.5 million at January 1, 2010, $2.2 million atDecember 31, 2010, $1.9 million at December 31, 2011, $1.5 millionat December 31, 2012.

Farm Credit East, ACA Opening Balance Sheet As of January 1, 2010

Assets First

Pioneer Western New York

Pro-Forma

Loans $ 3,079,138 $ 1,001,583 $ 4,080,721 Less - Allowance 40,764 - 40,764

Nonaccretable loan credit mark - (7,023) (7,023)

Accretable loan yield mark - 2,473 2,473

Net Loans 3,038,374 997,033 4,035,407

Cash 5,389 4,006 9,395

Accrued Interest Receivable 11,698 3,339 15,037

Investment in CoBank, ACB 107,551 34,736 142,287

Investment in Rural Investments, LLC - 7,937 7,937

Premises and Equipment, net 12,174 4,973 17,147

Other Property Owned 267 - 267

Other Assets 22,800 5,968 28,768

Total assets $ 3,198,253 $ 1,057,992 $ 4,256,245

Liabilities Notes payable to CoBank, ACB $ 2,630,249 $ 855,567 $ 3,485,816

Accretable note payable yield mark - 5,824 5,824

Net Notes payable to CoBank, ACB 2,630,249 861,391 3,491,640

Patronage refunds payable 23,400 8,400 31,800

Other Liabilities 16,752 6,930 23,682

Total Liabilities $ 2,670,401 $

876,721 $ 3,547,122

Members' Equity Capital stock and participation certificates $ 8,850 $ 2,902 $ 11,752 Accumulated other comprehensive loss (15,943) - (15,943)

Allocated surplus 41,528 14,000 55,528

Unallocated surplus 493,417 - 493,417

Additional paid-in capital - 164,369 164,369

Total Members' Equity 527,852 181,271 709,123 Total Liabilities and Members' Equity $ 3,198,253 $ 1,057,992 $ 4,256,245

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OperationsThe Farm Credit Act sets forth the types of authorized lendingactivity, persons eligible to borrow, and financial services whichcan be offered by the Association. The Association isauthorized to provide, either directly or in participation withother lenders, credit, credit commitments and related services toeligible borrowers. Eligible borrowers include farmers, ranchers,producers or harvesters of aquatic products, rural residents andfarm-related businesses.

The Association provides additional services to borrowers suchas financial recordkeeping, payroll, tax return preparation, taxplanning, farm accounting software, fee appraisals, farmbusiness consulting, and leasing. The Association also offerscredit life insurance and multi-peril crop insurance to itsborrowers, as an agent.

Upon request, stockholders of the Association will be providedwith a CoBank Annual Report to Stockholders, which includesthe combined financial statements of the Bank and its relatedAssociations. The Association’s financial condition may beimpacted by factors which affect CoBank. CoBank’s AnnualReport to Stockholders discusses the material aspects of itsfinancial condition, changes in financial condition, and results ofoperations. In addition, the CoBank Annual Report identifiesfavorable and unfavorable trends, significant events,uncertainties and the impact of activities of the InsuranceCorporation. The lending and financial services performed byCoBank are described in Note 1 of CoBank’s Annual Report toStockholders.

NOTE 2 – Summary of Significant Accounting Policies

The accounting and reporting policies of the Associationconform with accounting principles generally accepted in theUnited States of America (GAAP) and prevailing practices withinthe banking industry. The preparation of financial statements inconformity with GAAP requires management to make estimatesand assumptions that affect the amounts reported in thefinancial statements and accompanying notes. Significantestimates are discussed in these footnotes, as applicable.Actual results may differ from these estimates.

Certain amounts in prior year’s financial statements have beenreclassified to conform to current financial statementpresentation. The consolidated financial statements include the

accounts of Farm Credit East, PCA and Farm Credit East,FLCA. All inter-company transactions have been eliminated inconsolidation.

Recently Issued or Adopted AccountingPronouncementsIn December 2011, the Financial Accounting Standards Board(FASB) issued guidance entitled, “Balance Sheet —Disclosures about Offsetting Assets and Liabilities.” Theguidance requires an entity to disclose information aboutoffsetting and related arrangements to enable users of itsfinancial statements to understand the effect of thosearrangements on its financial position. This includes the effector potential effect of rights of setoff associated with an entity’srecognized assets and recognized liabilities. The requirementsapply to recognized financial instruments and derivativeinstruments that are offset in accordance with the rights ofoffset set forth in accounting guidance and for thoserecognized financial instruments and derivative instrumentsthat are subject to an enforceable master netting arrangementor similar agreement, irrespective of whether they are offset ornot. This guidance is to be applied retrospectively for allcomparative periods and is effective for annual reportingperiods beginning on or after January 1, 2013, and interimperiods within those annual periods. The adoption of thisguidance will not impact the Association’s financial conditionor its results of operations, but will result in additionaldisclosures.

In September 2011, the FASB issued guidance entitled,“Compensation – Retirement Benefits – Multiemployer Plans.”The guidance is intended to provide more information about anemployer’s financial obligations to a multiemployer pensionplan, which should help financial statement users betterunderstand the financial health of significant plans that theemployer participates. The additional disclosures include: a) adescription of the nature of plan benefits, b) a qualitativedescription of the extent to which the employer could beresponsible for the obligations of the plan, including benefitsearned by employees during employment with anotheremployer, and c) other quantitative information to help usersunderstand the financial information about the plan. Theamendments are effective for annual periods for fiscal yearsending after December 15, 2012 for non-public entities. Theamendments should be applied retrospectively for all prior

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periods presented. The adoption did not impact theAssociation’s financial condition or results of operation.

In June and December 2011, the FASB issued guidance entitled,“Comprehensive Income – Presentation of ComprehensiveIncome.” This guidance is intended to increase the prominenceof other comprehensive income in financial statements. Themain provisions of the guidance provides that an entity thatreports items of other comprehensive income has the option topresent comprehensive income in either one or two consecutivefinancial statements. This guidance did not change the itemsthat must be reported in other comprehensive income. Witheither approach, an entity is required to present reclassificationadjustments for items reclassified from other comprehensiveincome to net income in the statement(s). The December 2011guidance deferred the effective date for the presentation ofreclassification adjustments.

This guidance is to be applied retrospectively and is effective forfiscal years, and interim periods within those years, beginningafter December 15, 2011. The adoption of this guidance will notimpact financial condition or results of operations, but resulted inchanges to the presentation of comprehensive income.

not to be required to sell the security before recovery of itsamortized cost basis less any current-period credit loss, theimpairment is other-than-temporary and should be recognizedcurrently in earnings in an amount equal to the entire differencebetween fair value and amortized cost. If a credit loss exists, butan entity does not intend to sell the impaired debt security andis not more likely than not to be required to sell before recovery,the impairment is other-than-temporary and should be separatedinto (i) the estimated amount relating to credit loss, and (ii) theamount relating to all other factors. Only the estimated creditloss amount is recognized currently in earnings, with theremainder of the loss amount recognized in other comprehensiveincome. Gains and losses on the sales of investments available-for-sale are determined using the specific identification method.Premiums and discounts are amortized or accreted into interestincome over the term of the respective issues. The Associationdid not hold any available-for-sale investment securities as ofDecember 31, 2012, 2011 and 2010.

CashCash, as included in the statement of cash flows, representscash on hand and on deposit at banks.

Investment SecuritiesThe Association, as permitted under the FCA regulations, canhold investments for purposes of maintaining a liquidity reserve,managing short-term surplus funds and managing interest raterisk. The Association’s investments may not necessarily be heldto maturity and accordingly are classified as available-for-sale.These investments are reported at fair value with unrealizedgains and losses that are netted and reported as a separatecomponent of members’ equity (accumulated othercomprehensive income (loss)) in the consolidated balance sheet.Changes in the fair value of these investments are reflected asdirect charges or credits other comprehensive income, unlessthe investment is deemed to be other than temporarily impaired.Impairment is considered to be other-than-temporary if thepresent value of cash flows expected to be collected from thedebt security is less than the amortized cost basis of the security(any such shortfall is referred to as a “credit loss”). If an entityintends to sell an impaired debt security or is more likely than

Loans and Allowance for Loan LossesLong-term real estate mortgage loans generally have maturitiesranging from 5 to 40 years. Substantially all short-term andintermediate-term loans for agricultural production or operatingpurposes have maturities of 10 years or less. Loans are carried attheir principal amount outstanding adjusted for charge-offs anddeferred loan fees or costs. Loan origination fees and directloan origination costs are capitalized and the net fee or cost isamortized over the life of the related loan as an adjustment toyield.

Loans acquired in a business combination are initiallyrecognized at fair value, and therefore, no “carryover” of theallowance for loan losses is permitted. Those loans withevidence of credit quality deterioration at purchase are requiredto follow the authoritative accounting guidance on “Accountingfor Certain Loans or Debt Securities Acquired in a Transfer.”This guidance addresses accounting for differences betweencontractual cash flows and cash flows expected to be collectedfrom the initial investment in loans if those differences areattributable, at least in part, to credit quality. The initial fairvalues for these types of loans are determined by discountingboth principal and interest cash flows expected to be collectedusing an observable discount rate for similar instruments withadjustments that management believes a market participantwould consider in determining fair value.

Impaired loans are loans for which it is probable that principaland interest will not be collected according to the contractual

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terms of the loan and are generally considered substandard ordoubtful which is in accordance with the loan rating model, asdescribed below. A loan is considered contractually past duewhen any principal repayment or interest payment required bythe loan instrument is not received on or before the due date. Aloan shall remain contractually past due until it is formallyrestructured or until the entire amount past due, includingprincipal, accrued interest, and penalty interest accrued as theresult of past due status, is collected or otherwise discharged infull.

Impaired loans are generally placed in nonaccrual status whenprincipal or interest is delinquent for 90 days or more (unlessadequately secured and in the process of collection) orcircumstances indicate that collection of principal and/or interestis in doubt. When a loan is placed in nonaccrual status, accruedinterest deemed uncollectible is either reversed (if accrued in thecurrent year) and/or charged-off against the allowance for loanlosses (if accrued in the prior year). Loans are charged-off at thetime they are determined to be uncollectible.

A restructured loan constitutes a troubled debt restructuring iffor economic or legal reasons related to the debtor’s financialdifficulties the Association grants a concession to the debtorthat it would not otherwise consider.

When loans are in nonaccrual status, the Association’s generalpractice is to apply and record on its financial records anypayments received on nonaccrual loans in the followingsequence: (1) to existing principal which includes outstandingprincipal, accounts receivable and accrued interest receivable asof the date of transfer plus any additional advances made sincethe loan was placed in nonaccrual status; (2) to recover anycharged-off amount; and (3) to interest income. Nonaccrualloans may, at times, be maintained on a cash basis. Generallycash basis refers to the recognition of interest income from cashpayments received on certain nonaccrual loans for which thecollectibility of the recorded investment in the loan is no longerin doubt and the loan does not have a remaining unrecoveredprior charge-off associated with it. Nonaccrual loans may bereturned to accrual status when principal and interest are currentand reinstatement is supported by a period of sustainedperformance in accordance with the contractual terms of thenote and/or loan agreement and the loan is not classified“doubtful” or “loss”.

The Association purchases loan and lease participations fromother System and non-System entities to generate additional

earnings and diversify risk- related to existing commoditiesfinanced and the geographic area served. Additionally, theAssociation sells a portion of certain large loans to other Systemand non-System entities to reduce risk and comply withestablished lending limits. Loans are sold following accountingrequirements for sale treatment.

The Association uses a two-dimensional loan rating modelbased on an internally generated combined system risk ratingguidance that incorporates a 14-point risk-rating scale to identifyand track the probability of borrower default and a separatescale addressing loss given default over a period of time.Probability of default is the probability that a borrower willexperience a default within 12 months from the date of thedetermination of the risk rating. A default is considered to haveoccurred if the lender believes the borrower will not be able topay its obligation in full or the borrower is past due more than 90days. The loss given default is management’s estimate as to theanticipated economic loss on a specific loan assuming defaulthas occurred or is expected to occur within the next 12 months.

Each of the probability of default categories carries a distinctpercentage of default probability. The 14-point risk rating scaleprovides for granularity of the probability of default, especiallyin the acceptable ratings. There are nine acceptable categoriesthat range from a borrower of the highest quality to a borrowerof minimally acceptable quality. The probability of defaultbetween 1 and 9 is very narrow and would reflect almost nodefault to a minimal default percentage. The probability ofdefault grows more rapidly as a loan moves from a “9” to otherassets especially mentioned and grows significantly as a loanmoves to a substandard (viable) level. A substandard (non-viable) rating indicates that the probability of default is almostcertain.

The credit risk rating methodology is a key component of theAssociation’s allowance for loan losses evaluation, and isgenerally incorporated into its loan underwriting standards andinternal lending limit. The allowance for loan losses ismaintained at a level considered adequate by management toprovide for probable and estimable losses inherent in the loanportfolio. The allowance is based on a periodic evaluation of theloan portfolio by management in which numerous factors areconsidered, including economic conditions, loan portfoliocharacteristics and composition, collateral values, loan quality,current production conditions and economic conditions, andprior loan loss experience. The allowance for loan lossesencompasses various judgments, evaluations and appraisals

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with respect to the loans and their underlying collateral that, bytheir nature, contain elements of uncertainty and imprecision.Changes in the agricultural economy and their impact onborrower repayment capacity will cause these variousjudgments, evaluations and appraisals to change over time.Accordingly, actual circumstances could vary significantly fromthe institutions’ expectations and predictions of thosecircumstances. Management considers the following macro-economic factors in determining and supporting the level ofallowance for loan losses: the concentration of lending inagriculture, combined with uncertainties associated withfarmland values, commodity prices, exports, governmentassistance programs, regional economic effects and weather-related influences.

The allowance for loan losses includes components for loansindividually evaluated for impairment, loans collectivelyevaluated for impairment and loans with deteriorated creditquality. Generally, for loans individually evaluated theallowance for loan losses represents the difference betweenthe recorded investment in the loan and the present value ofthe cash flows expected to be collected discounted at theloan’s effective interest rate, or at the fair value of the collateral,if the loan is collateral dependent. For those loans collectivelyevaluated for impairment, the allowance for loan losses isdetermined using the risk-rating model as previouslydiscussed.

Investment in CoBank, ACBThe Association’s investment in CoBank is in the form of ClassE stock. The minimum required investment is 4.00 percent of theprior year’s average direct loan volume. The investment inCoBank is composed of patronage based stock and purchasedstock. Accounting for this investment is on the cost plusallocated equities basis.

Other Property OwnedOther property owned, consisting of real and personal propertyacquired through foreclosure or deed in lieu of foreclosure, isrecorded at fair value less estimated selling costs uponacquisition. Any initial reduction in the carrying amount of aloan to the fair value of the collateral received is charged to theallowance for loan losses. On at least an annual basis, revisedestimates to the fair value less cost to sell are reported asadjustments to the carrying amount of the asset, provided thatsuch adjusted value is not in excess of the carrying amount at

acquisition. Income and expenses from operations and carryingvalue adjustments are included in other property ownedexpenses, net in the consolidated Statement of ComprehensiveIncome.

Premises and EquipmentPremises and equipment are carried at cost less accumulateddepreciation. Land is carried at cost. Depreciation is providedon the straight-line method over the estimated useful lives of theassets. Useful lives for the building is 39 years and range from 3to 15 years for furniture, equipment and automobiles. Gains andlosses on dispositions are reflected in current operations.Maintenance and repairs are charged to operating expense andimprovements are capitalized.

Employee Benefit PlansSubstantially all employees of the Association may be eligible toparticipate in various retirement plans. Association employeeshired prior to January 1, 2007 participate in a qualified definedbenefit pension plan, which is noncontributory and coverssubstantially all employees. The net expense for this plan isrecorded as employee benefit expense. The “Projected UnitCredit” actuarial method is used for financial reporting andfunding purposes.

Effective January 1, 2007, the Association closed the existingdefined benefit pension plan to new participants. All employeeshired on or after January 1, 2007 are participants in anoncontributory defined contribution plan. Participants in thisplan receive a fixed percentage of their eligible wages, based onyears of service, to an investment account maintained for theemployee. Costs for this plan are expensed as funded andrecorded as employee benefit expense.

Association employees are also eligible to participate in anemployee savings plan (Thrift Plan). The Association matches acertain percentage of employee contributions with costs beingexpensed as funded. These costs are recorded as employeebenefit expense.

The Association provides certain health care and life insurancebenefits to eligible retired employees. Substantially allemployees may become eligible for these benefits if they reachearly retirement age while working for the Association. Theanticipated costs of these benefits are accrued during the periodof the employee’s active service and are classified as employee

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benefit expense. However, substantially all participants pay thefull premiums associated with these benefits.

Income TaxesAs previously described, Farm Credit East, ACA operates twowholly owned subsidiaries. Farm Credit East, FLCA is exemptfrom federal and other income taxes as provided in the FarmCredit Act. Farm Credit East, ACA and its subsidiary Farm CreditEast, PCA are subject to Federal and State income tax. All entitiesare eligible to operate as cooperatives that qualify for taxtreatment under Subchapter T of the Internal Revenue Code.Accordingly, under specified conditions, the Association canexclude from taxable income amounts distributed as qualifiedpatronage refunds in the form of cash, stock or allocated surplus.Provisions for income taxes are made only on those earnings thatwill not be distributed as qualified patronage refunds. TheAssociation distributes patronage on the basis of book income.Operating expenses are allocated to each subsidiary based onestimated relative service. All significant transactions betweenthe subsidiaries and the parent company have been eliminated inconsolidation. Deferred taxes are recorded on the tax effect of alltemporary differences. A valuation allowance is provided againstdeferred tax assets to the extent that it is more likely than not(over 50 percent probability), based on management’s estimate,that they will not be realized. The consideration of valuationallowances involves various estimates and assumptions as tofuture taxable earnings, including the effects of our expectedpatronage program, which reduces taxable earnings.

Deferred income taxes have not been provided by theAssociation on patronage stock distributions from the FarmCredit Bank of Springfield (FCB) prior to January 1, 1993, theadoption date of the FASB guidance on income taxes.Management’s intent is (1) to permanently invest these and otherundistributed earnings in the FCB, thereby indefinitelypostponing their conversion to cash, or (2) to pass through anydistribution related to pre-1993 earnings to Associationborrowers through qualified patronage allocations. CoBank isthe successor to the FCB.

The Association has not provided deferred income taxes onamounts allocated to the Association which relate to the FCB’sand CoBank’s post-1992 earnings to the extent that suchearnings will be passed through to Association borrowersthrough qualified patronage allocations. Additionally, deferredincome taxes have not been provided on the FCB’s and CoBank’spost-1992 unallocated earnings. CoBank currently has no plans

to distribute unallocated earnings and does not contemplatecircumstances that, if distributions were made, would result intaxes being paid at the Association level.

Patronage Income from CoBank, ACBThe Association records patronage refunds from CoBank, ACBon the accrual basis.

Derivative Instruments and Hedging ActivityThe Association is party to derivative financial instruments,primarily interest rate swaps, which are principally used tomanage interest rate risk on assets, liabilities and anticipatedtransactions. Derivatives are recorded on the balance sheet asassets and liabilities at fair value.

Changes in the fair value of a derivative are recorded in currentperiod earnings or accumulated other comprehensive income(loss) depending on the use of the derivative and whether itqualifies for hedge accounting. For fair-value hedgetransactions, which hedge changes in the fair value of assets,liabilities, or firm commitments, changes in the fair value of thederivative are recorded in earnings and will generally be offset bychanges in the hedged item’s fair value. For cash-flow hedgetransactions, which hedge the variability of future cash flowsrelated to a variable-rate asset, liability, or a forecastedtransaction, changes in the fair value of the derivative willgenerally be deferred and reported in accumulated othercomprehensive income (loss). The gains and losses on thederivative that are deferred and reported in accumulated othercomprehensive income (loss) will be reclassified as earnings inthe periods in which earnings are impacted by the variability ofthe cash flows of the hedged item. The ineffective portion of allhedges is recorded in current period earnings. For derivativesnot designated as a hedging instrument, the related change in fairvalue is recorded in current period earnings.

The Association formally documents all relationships betweenhedging instruments and hedged items, as well as its riskmanagement objective and strategy for undertaking varioushedge transactions. This process includes linking all derivativesthat are designated as fair value or cash flow hedges to (1) aportion of our long-term variable loans on the balance sheet or(2) firm commitments or forecasted transactions. TheAssociation also formally assesses (both at the hedge’sinception and on an ongoing basis) whether the derivatives thatare used in hedging transactions have been highly effective inoffsetting changes in the fair value or cash flows of hedged items

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and whether those derivatives may be expected to remain highlyeffective in future periods. The Association uses regressionanalysis (or statistical analysis) to assess the effectiveness of itshedges. The Association discontinues hedge accountingprospectively when the Association determines that 1) aderivative is no longer effective in offsetting changes in the fairvalue or cash flows of a hedged item; 2) the derivative expires oris sold, terminated, or exercised; 3) it is no longer probable thatthe forecasted transaction will occur; 4) a hedged firmcommitment no longer meets the definition of a firm commitment;or 5) management determines that designating the derivative asa hedging instrument is no longer appropriate. The accountingguidance provides for various remedies in the event hedgeaccounting is discontinued. Due to the structure of theAssociation’s current swap transactions, management has noreason to believe that hedge accounting qualifications will notbe met and believes the transactions will continue to berecorded in the manner described in Note 13 of theseconsolidated financial statements.

Fair Value MeasurementThe Accounting guidance defines fair value, establishes aframework for measuring fair value and expands disclosuresabout fair value measurements. It describes three levels ofinputs that may be used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets orliabilities that the reporting entity has the ability to access at themeasurement date. Level 1 asset and liabilities include debt andequity securities and derivative contracts that are traded in anactive exchange market, as well as certain U.S. Treasury, otherU.S. Government and agency mortgage-backed debt securitiesthat are highly liquid and are actively traded in over-the-countermarkets. Also included in Level 1 are assets held in trust funds,which relate to the Association’s deferred compensation planand our supplemental retirement plan. The trust funds includeinvestments that are actively traded and have quoted net assetvalues that are observable in the marketplace. Pension planassets that are invested in equity securities, including mutualfunds, and fixed-income securities that are actively traded arealso included in Level 1.

Level 2 — Observable inputs other than quoted prices includedwithin Level 1 that are observable for the asset or liability eitherdirectly or indirectly. Level 2 inputs include the following: (a)quoted prices for similar assets or liabilities in active markets; (b)

quoted prices for identical or similar assets or liabilities inmarkets that are not active so that they are traded lessfrequently than exchange-traded instruments, the prices are notcurrent or principal market information is not released publicly;(c) inputs other than quoted prices that are observable such asinterest rates and yield curves, prepayment speeds, credit risksand default rates and (d) inputs derived principally from orcorroborated by observable market data by correlation or othermeans. This category generally includes certain U.S.Government and agency mortgage-backed debt securities,corporate debt securities, and derivative contracts. Pensionplan assets that are derived from observable inputs, includingcorporate bonds and mortgage-backed securities are reported inLevel 2.

Level 3 — Unobservable inputs that are supported by little or nomarket activity and that are significant to the fair value of theassets or liabilities. These unobservable inputs reflect thereporting entity’s own assumptions about assumptions thatmarket participants would use in pricing the asset or liability.Level 3 assets and liabilities include financial instruments whosevalues are determined using pricing models, discounted cashflow methodologies, or similar techniques, as well as instrumentsfor which the determination of fair value requires significantmanagement judgment or estimation. This category generallyincludes certain private equity investments, retained residualinterests in securitizations, asset-backed securities, highlystructured or long-term derivative contracts, certain loans andother property owned. Pension plan assets such as certainmortgage-backed securities that are supported by little or nomarket data in determining the fair value are included in Level 3.The fair value disclosures are presented in Note 13 of theseconsolidated financial statements.

Off-Balance Sheet Credit ExposuresCommitments to extend credit are agreements to lend tocustomers, generally having fixed expiration dates or othertermination clauses that may require payment of a fee.Commercial letters of credit are conditional commitments issuedto guarantee the performance of a customer to a third party.These letters of credit are issued to facilitate commerce andtypically result in the commitment being funded when theunderlying transaction is consummated between the customerand third party. The credit risk associated with commitments toextend credit and commercial letters of credit is essentially thesame as that involved with extending loans to customers and is

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subject to normal credit policies. Collateral may be obtainedbased on management’s assessment of the customer’screditworthiness.

Pilot Investment Program and Mission RelatedInvestmentsOn July 1, 2005 the Farm Credit Administration approved a pilotinvestment program for the Association designed to provide anopportunity for the Association to invest in Western New Yorkagriculture. The approval provided for the ability to purchaseinvestments in a securitized pool of agricultural loans from RuralInvestments, LLC for a period of up to one year. On August 26,2005 the Association entered into an agreement with RuralInvestments, LLC (Rural Investments) a special purpose entitycreated by the Association and GSS Holdings, Inc. to hold loanssold by a commercial lender. Rural Investments was formedspecifically to own and securitize the loans and subsequentlysell the security to the Association as an investment. RuralInvestments sole member is GSS Holdings, Inc. a Delawarespecial purpose entity created to own Rural Investments. TheAssociation is the manager and through agreement controlsRural Investments and all its activities. All benefits and risksaccrue to the Association as manager. The FLCA holds theinvestment security certificate.

The investment is carried at the lower of cost or fair marketvalue. A valuation to determine fair market value is performedmonthly by management, taking into account cash flows and theunderlying loans contained in the investment. Income isrecorded on investments only as it relates to underlying loanscontained in the security that would be classified as accruinghad the Association owned the loans. Interest is accrued andcredited to interest income based upon the daily investmentvalue. Any difference between amortized cost and actual

borrower balances on the underlying loans is accreted tointerest income as payments are received over the life of theinvestment. Any reduction in value recognized through theongoing fair market value determination is recorded as a currentcharge and will directly impact the income statement at the timeof recognition. No valuation allowance is maintained. Income isnot recognized on the underlying loans contained in theinvestment for loans that would be considered impaired if theloans were owned by the Association. The Association’spractice is to apply and record payments received on impairedunderlying loans in the following sequence:

1. To existing principal until all principal is paid, and then2. To interest income

Underlying loans contained in the investment may be returnedto accrual status once performance criteria are met. Uponreinstatement, previously unrecognized income will berecognized as payments are received over the remaining life ofthe investment. See Note 14 for additional information regardingthe rural investment.

The Association may also hold additional investments inaccordance with mission-related and other investment programs,approved by the Farm Credit Administration. These programsallow the Association to make investments that further theSystem’s mission to serve rural America. The Association heldmission related investments which are classified as loanstotaling $9,406, $7,593 and $7,013 at December 31, 2012, 2011 and2010, respectively. The Association also held an equityinvestment in FarmStart, LLP of $1,184, $1,088 and $999 that isaccounted for on the equity method and is classified as otherassets at December 31, 2012, 2011 and 2010, respectively.

NOTE 3 – Loans and Allowance for Loan Losses

A summary of loans follows:

As of December 31 2012 % 2011 % 2010 % Real estate mortgage $ 2,259,325 48.2% $ 2,094,202 48.2% $ 2,037,448 47.7% Production and intermediate term 1,713,175 36.5 1,658,760 38.1 1,631,880 38.2 Loans to cooperatives 165,047 3.5 123,320 2.8 152,205 3.6 Processing and marketing 225,349 4.8 195,700 4.5 180,241 4.2 Farm related business 244,788 5.2 214,856 4.9 198,059 4.6 Communication 4,195 0.1 112 0.0 159 0.0 Energy 12,941 0.3 5,855 0.1 7,054 0.2 Rural residential real estate 61,182 1.3 59,781 1.4 61,918 1.4 Water/Waste water 6,666 0.1 0 0.0 6,140 0.1 Total Loans $ 4,692,668 100.0% $ 4,352,586 100.0% $ 4,275,104 100.0%

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FARM CREDIT EAST | 2012 ANNUAL REPORT

The Association may purchase or sell participation interests with other parties in order to diversify risk, manage loan volume andcomply with Farm Credit Administration regulations. The following table presents information regarding participations purchased andsold as of December 31, 2012 which are also included in the table above:

CoBank, ACB Participations

Other Farm Credit

Institutions Participations

Non-Farm Credit

Institutions Participations

Total

Participations

Purchased

Sold

Purchased

Sold

Purchased

Sold

Purchased

Sold Real estate mortgage $ 1,245 $ 22,175 $ 164,320 $ 10,085 $ 0 $ 0 $ 165,565 $ 32,260 Production and intermediate 24,164 133,826 198,362 71,213 0 0 222,526 205,039 Agribusiness 219,634 73,498 93,568 120,245 146,532 8,634 459,734 202,377 Communication 4,115 0 0 0 0 0 4,115 0 Energy 12,941 0 0 0 0 0 12,941 0 Water/Water waste 6,666 0 0 0 0 0 6,666 0 Total Loans $ 268,765 $ 229,499 $ 456,250 $ 201,543 $ 146,532 $ 8,634 $ 871,547 $ 439,676

The Association’s concentration of credit risk in various agricultural commodities is shown in the following table. While the amountsrepresent the Association’s maximum potential credit risk as it relates to recorded loan principal, a substantial portion of theAssociation’s lending activities is collateralized and the Association’s exposure to credit loss associated with lending activities isreduced accordingly. An estimate of the Association’s credit risk exposure is considered in the determination of the allowance forloan losses.

As of December 31 2012 2011 2010 Commodity Amount % Amount % Amount % Dairy $ 1,105,306 23.6% $ 1,035,651 23.8% $ 1,048,085 24.5% Cash Field 519,204 11.1% 484,176 11.1% 483,581 11.3% Livestock 448,121 9.5% 420,631 9.7% 415,685 9.7% Timber 422,075 9.0% 405,343 9.3% 417,541 9.8% Fruit 313,363 6.7% 272,026 6.2% 251,938 5.9% Greenhouse 264,859 5.6% 278,867 6.4% 269,489 6.3% Farm Services 239,125 5.1% 222,171 5.1% 209,974 4.9% Nursery 235,025 5.0% 233,120 5.4% 232,961 5.4% Processing & Marketing 218,647 4.7% 198,983 4.6% 174,189 4.1% Vegetables 175,360 3.7% 168,823 3.9% 150,273 3.5% Aquatic 140,123 3.0% 116,620 2.7% 110,834 2.6% Cranberries 104,144 2.2% 86,986 2.0% 93,552 2.2% All Other 507,316 10.8% 429,189 9.8% 417,002 9.8% Total $ 4,692,668 100% $ 4,352,586 100% $ 4,275,104 100%

The amount of collateral obtained, if deemed necessary uponextension of credit, is based on management’s credit evaluationof the borrower. Collateral held varies, but typically includesfarmland and income-producing property, such as crops andlivestock as well as receivables. Long-term real estate loans aresecured by the first liens on the underlying property. Federalregulations state that long-term real estate loans are not toexceed 85% (97% if guaranteed by a government agency) of theproperty’s appraised value. However, a decline in a property’smarket value subsequent to loan origination or advances, or

other actions necessary to protect the financial interest of theAssociation in the collateral, may result in the loan to valueratios in excess of the regulatory maximum.

To mitigate the risk of loan losses, the Association may enterinto long-term standby commitments to purchase agreementswith the Federal Agricultural Mortgage Corporation (FarmerMac). The agreements, which are effectively credit guaranteesthat will remain in place until the loans are paid in full, give theAssociation the right to sell the loans identified in the

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FARM CREDIT EAST | 2012 ANNUAL REPORT

agreements to Farmer Mac in the event of default (typically fourmonths past due), subject to certain conditions. The balance ofloans under long-term standby commitments was $62,238,$75,724 and $87,896 at December 31, 2012, 2011 and 2010respectively. Fees paid to Farmer Mac for such commitmentstotaled $359, $419 and $466 for the years ended December 31,2012, 2011 and 2010, respectively. These amounts are classifiedas noninterest expense. In addition to Farmer Mac, theAssociation has credit enhancements with federal governmentagencies totaling $300.8 million, $310.7 million and $317.7 millionat December 31, 2012, 2011 and 2010 respectively.

One credit quality indicator utilized by the Bank andAssociations is the Farm Credit Administration Uniform LoanClassification System that categorizes loans into five categories.The categories are defined as follows:

• Acceptable – assets are expected to be fully collectibleand represent the highest quality,

• Other assets especially mentioned (OAEM) – assets arecurrently collectible but exhibit some potentialweakness,

• Substandard – assets exhibit some serious weakness inrepayment capacity, equity, and/or collateral pledgedon the loan,

• Doubtful – assets exhibit similar weaknesses tosubstandard assets; however, doubtful assets haveadditional weaknesses in existing factors, conditionsand values that make collection in full highlyquestionable, and

• Loss – assets are considered uncollectible.

December 31, 2010

Acceptable

OAEM

Substandard/Doubtful

Total

Real estate mortgage 41.6% 3.4% 2.7% 47.7% Production and Intermediate term 32.2% 3.1% 2.8% 38.1% Loans to cooperatives 3.3% 0.3% 0.1% 3.7% Processing and marketing 3.8% 0.3% 0.1% 4.2% Farm related business 4.2% 0.3% 0.1% 4.6% Energy and Water/Waste water 0.3% 0.0% 0.0% 0.3% Rural residential real estate 1.3% 0.0% 0.1% 1.4% Total 86.7% 7.4% 5.9% 100.0%

Impaired loans are loans for which it is probable that all principaland interest will not be collected according to the contractualterms. Interest income recognized and payments received onnonaccrual impaired loans are applied in a similar manner as fornonaccrual loans, as described in Note 2.

The following table presents information relating to impairedloans:

As of December 31 2012 2011 2010 Nonaccrual loans: Current as to principal and interest $ 37,298 $ 14,551 $ 22,033 Past due 34,902 34,171 28,553 Total nonaccrual loans $ 72,200 $ 48,722 $ 50,586 Impaired accrual loans: Restructured accrual loans $ 1,572 $ 1,613 $ 0 Accrual loans 90 days or more past due 1,374 2,746 3,006 Total impaired accrual loans $ 2,946 $ 4,359 $ 3,006 Total impaired loans $ 75,146 $ 53,081 $ 53,592

December 31, 2012

Acceptable

OAEM

Substandard/Doubtful

Total

Real estate mortgage 43.4% 1.8% 2.9% 48.1% Production and Intermediate term 33.5% 1.4% 1.6% 36.5% Loans to cooperatives 3.5% 0.0% 0.0% 3.5% Processing and marketing 4.6% 0.2% 0.0% 4.8% Farm related business 4.8% 0.2% 0.2% 5.2% Communication 0.1% 0.0% 0.0% 0.0% Energy and Water/Waste water 0.4% 0.0% 0.0% 0.4% Rural residential real estate 1.2% 0.1% 0.1% 1.4% Total 91.5% 3.7% 4.8% 100.0%

December 31, 2011

Acceptable

OAEM

Substandard/Doubtful

Total

Real estate mortgage 42.4% 2.3% 3.4% 48.1% Production and Intermediate term 34.0% 1.6% 2.4% 38.0% Loans to cooperatives 2.8% 0.0% 0.1% 2.9% Processing and marketing 4.3% 0.2% 0.0% 4.5% Farm related business 4.7% 0.1% 0.1% 4.9% Energy and Water/Waste water 0.1% 0.0% 0.0% 0.1% Rural residential real estate 1.3% 0.1% 0.1% 1.5% Total 89.6% 4.3% 6.1% 100.0%

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Nonperforming assets (including related accrued interest) and related credit quality statistics are as follows:

Additional impaired loan information is as follows:

As of December 31, 2012

For the period ended 12/31/12

Recorded Investment

Unpaid Principal Balancea

Related

Allowance

Average Impaired

Loans

Interest Income

Recognized Impaired loans with a related allowance for loan losses: Real estate mortgage $ 5,560 $ 11,708 $ 3,679 $ 5,696 $ (633) Production and intermediate term 2,011 2,256 494 1,510 (552) Farm-related business 18 24 12 18 0 Rural residential real estate 348 446 140 357 0 Total $ 7,937 $ 14,434 $ 4,325 $ 7,581 $ (1,185) Impaired loans with no related allowance for loan losses: Real estate mortgage $ 39,766 $ 49,247 $ 0 $ 31,104 $ 1,199 Production and intermediate term 23,722 41,113 0 20,105 176 Loans to cooperatives 0 0 0 970 321 Processing and marketing 2,403 2,403 0 2,426 98 Farm-related business 1,278 2,981 0 1,475 71 Rural residential real estate 40 79 0 45 15 Total $ 67,209 $ 95,823 $ 0 $ 56,125 $ 1,880 Total Impaired loans: Real estate mortgage $ 45,326 $ 60,955 $ 3,679 $ 36,800 $ 566 Production and intermediate term 25,733 43,369 494 21,615 (376) Loans to cooperatives 0 0 0 970 321 Processing and marketing 2,403 2,403 0 2,426 98 Farm-related business 1,296 3,005 12 1,493 71 Rural residential real estate 388 525 140 402 15 Total $ 75,146 $ 110,257 $ 4,325 $ 63,706 $ 695

aUnpaid principal balance represents the borrower’s contractual balance of the loan

As of December 31 2012 2011 2010 Nonaccrual loans: Real estate mortgage $ 44,052 $ 26,189 $ 25,541 Production and intermediate term 26,464 16,643 17,354 Agribusiness 1,296 5,477 5,893 Rural residential real estate 388 413 450 Water/Waste water 0 0 1,348 Total nonaccrual loans $ 72,200 $ 48,722 $ 50,586 Accrual restructured loans: Agribusiness $ 1,572 $ 1,614 $ 0 Total restructured loans $ 1,572 $ 1,614 $ 0 Accrual loans 90 days or more past due: Real estate mortgage $ 1,313 $ 1,554 $ 697 Production and intermediate term 102 1,307 2,937 Total accrual loans 90 days or more past due $ 1,415 $ 2,861 $ 3,634 Total nonperforming loans $ 75,187 $ 53,197 $ 54,220 Other owned property $ 2,533 $ 3,337 $ 2,609 Total nonperforming assets $ 77,720 $ 56,534 $ 56,829

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There were no material commitments to lend additional funds to debtors whose loans were classified as impaired at December 31,2012.

A restructuring of a debt constitutes a troubled debt restructuring if the creditor for economic or legal reasons related to the debtor’sfinancial difficulties grants a concession to the debtor that it would not otherwise consider.

The following table presents additional information regarding troubled debt restructurings (whether accrual or nonaccrual) thatoccurred during the period. In 2012 and 2011 the concession granted by the Association was a below market interest rate.

Year Ended December 31, 2012

Year Ended December 31, 2011

Pre-modification

Outstanding Recorded

Investment*

Post-modification

Outstanding Recorded

Investment*

Pre-modification

Outstanding Recorded

Investment*

Post-modification

Outstanding Recorded

Investment* Real estate mortgage $ 11,710 $ 11,710 $ 3,517 $ 3,517 Production and intermediate term 8,953 8,953 0 0 Total $ 20,663 $ 20,663 $ 3,517 $ 3,517

* pre-modification represents the recorded investment just prior to restructuring and post-modification represents the recorded investment immediately following the restructuring. The recorded investment is the face amount of the receivable increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges, or acquisition costs and may also reflect a previous direct write-down of the investment.

During 2012 and 2011, $0 troubled debt restructurings subsequently defaulted. Additional commitments to lend to borrowers whoseloans have been modified in TDRs were $0.4 million and $2.3 million at December 31, 2012 and December 31, 2011 respectively.

Impaired loans with a related allowance for loan losses: Real estate mortgage $ 10,347 $ 15,054 $ 1,371 $ 9,718 $ (60) Production and intermediate term 4,552 5,902 1,627 4,947 (60) Loans to cooperatives 2,263 2,444 600 1,636 (59) Farm-related business 163 179 22 187 (30) Rural residential real estate 368 444 165 382 0 Total $ 17,693 $ 24,023 $ 3,785 $ 16,870 $ (209) Impaired loans with no related allowance for loan losses: Real estate mortgage $ 17,049 $ 21,327 $ 0 $ 17,286 $ 880 Production and intermediate term 13,630 26,662 0 12,464 436 Loans to cooperatives 174 190 0 140 0 Processing and marketing 1,613 1,613 0 2,163 198 Farm-related business 2,877 4,850 0 3,642 (26) Energy and water/ waste disposal 0 0 0 781 (34) Rural residential real estate 45 94 0 48 32 Total $ 35,388 $ 54,736 $ 0 $ 36,524 $ 1,486 Total Impaired loans: Real estate mortgage $ 27,396 $ 36,381 $ 1,371 $ 27,004 $ 820 Production and intermediate term 18,182 32,564 1,627 17,411 376 Loans to cooperatives 2,437 2,634 600 1,776 (59) Processing and marketing 1,613 1,613 0 2,163 198 Farm-related business 3,040 5,029 22 3,829 (56) Energy and water/ waste disposal 0 0 0 781 (34) Rural residential real estate 413 538 165 430 32 Total $ 53,081 $ 78,759 $ 3,785 $ 53,394 $ 1,277 aUnpaid principal balance represents the borrower’s contractual balance of the loan

As of December 31, 2011 For the period ended 12/31/11

Recorded Investment

Unpaid Principal Balancea

Related

Allowance

Average Impaired

Loans

Interest Income

Recognized

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The following table provides information on outstanding loans restructured in troubled debt restructurings at period end. Theseloans are included as impaired loans in the impaired loan tables.

Loans Modified as TDRs

TDRs in Nonaccrual Status*

December 31, 2012

December 31, 2011

December 31, 2012

December 31, 2011

Real estate mortgage $ 14,748 $ 7,333 $ 14,748 $ 7,333 Production and intermediate term 8,953 0 8,953 0 Processing and marketing 1,572 1,613 0 0 Total $ 25,273 $ 8,946 $ 23,701 $ 7,333

* represents the portion of loans modified as TDRs (first column) that are in nonaccrual status

Interest income on nonaccrual loans that would have been recognized under the original terms of the loans are as follows:

For the period ended December 31 2012 2011 2010 Interest income which would have been recognized under the original loan terms $ 8,285 $ 4,696 $ 4,282 Less: interest income recognized 559 3,643 3,153 Forgone interest income $ 7,726 $ 1,053 $ 1,129

The following table provides an age analysis of past due loans at period end:

Note: The recorded investment in the receivable is the face amount increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges, or acquisition costs and may also reflect a previous direct write-down of the investment.

As of December 31, 2012

30-89 Days Past Due

90 Days or More

Past Due

Total Past Due

Not Past Due or less

than 30 Days Past

Due

Total Loans

Recorded

Investment >90 days and

accruing Real estate mortgage $ 27,044 $ 20,038 $ 47,082 $ 2,212,243 $ 2,259,325 $ 1,274 Production and intermediate term 9,034 11,702 20,736 1,692,439 1,713,175 100 Loans to cooperatives 0 0 0 165,047 165,047 0 Processing and marketing 501 0 501 224,848 225,349 0 Farm related business 296 849 1,145 243,643 244,788 0 Communication 0 0 0 4,195 4,195 0 Energy and Water/Waste water 0 0 0 19,607 19,607 0 Rural residential real estate 447 348 795 60,387 61,182 0 Total Loans $ 37,322 $ 32,937 $ 70,259 $ 4,622,409 $ 4,692,668 $ 1,374

As of December 31, 2011

30-89 Days Past Due

90 Days or More

Past Due

Total Past

Due

Not Past Due or

less than 30 Days Past Due

Total Loans

Recorded Investment >90 days

and accruing

Real estate mortgage $ 13,013 $ 16,360 $ 29,373 $ 2,064,829 $ 2,094,202 $ 1,539 Production and intermediate term 5,191 14,694 19,885 1,638,875 1,658,760 1,207 Loans to cooperatives 0 0 0 123,320 123,320 0 Processing and marketing 0 0 0 195,700 195,700 0 Farm related business 431 2,870 3,301 211,555 214,856 0 Communication 0 0 0 112 112 0 Energy and Water/Waste water 0 0 0 5,855 5,855 0 Rural residential real estate 592 57 649 59,132 59,781 0 Total Loans $ 19,227 $ 33,981 $ 53,208 $ 4,299,378 $ 4,352,586 $ 2,746

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A summary of the changes in the allowance for loan losses and the ending balance of loans outstanding are as follows:

Allowance for Loan Losses Ending

Balance at December 31, 2012

Recorded Investments in Loans Outstanding Ending Balance at

December 31, 2012 Individually

evaluated for impairment

Collectively evaluated for impairment

Individually evaluated for impairment

Collectively evaluated for impairment

Real estate mortgage $ 3,679 $ 16,204 $ 5,560 $ 2,253,765 Production and intermediate 494 23,176 2,011 1,711,164 Agri-business 12 30,348 18 635,165 Communications 0 75 0 4,195 Energy & Water/Waste water 0 580 0 19,608 Rural residential real estate 140 246 348 60,834 Total $ 4,325 $ 70,629 $ 7,937 $ 4,684,731

Allowance for Loan Losses Ending

Balance at December 31, 2011

Recorded Investments in Loans Outstanding Ending Balance at

December 31, 2011 Individually

evaluated for impairment

Collectively evaluated for impairment

Individually evaluated for impairment

Collectively evaluated for impairment

Real estate mortgage $ 1,371 $ 14,901 $ 10,347 $ 2,083,855 Production and intermediate 1,627 22,554 4,552 1,654,208 Agri-business 622 23,049 2,426 531,450 Communications 0 1 0 112 Energy & Water/Waste water 0 77 0 5,855 Rural residential real estate 165 219 368 59,413 Total $ 3,785 $ 60,801 $ 17,693 $ 4,334,893

Balance at December 31,

2011 Charge-Offs Recoveries

Provision for Loan Losses/(Loan Loss

Reversals)

Balance at December 31,

2012 Real estate mortgage $ 16,272 $ (4,180) $ 496 $ 7,300 $ 19,883 Production and intermediate 24,181 (6,333) 361 5,461 23,670 Agribusiness 23,671 (21) 0 6,705 30,360 Communications 1 0 0 74 75 Energy & Water/Waste water 77 0 45 458 580 Rural residential real estate 384 0 0 2 386 Total $ 64,586 $ (10,534) $ 902 $ 20,000 $ 74,954

Balance at December 31,

2010 Charge-Offs Recoveries

Provision for Loan Losses/(Loan Loss

Reversals)

Balance at December 31,

2011 Real estate mortgage $ 14,612 $ (2,347) $ 0 $ 4,007 $ 16,272 Production and intermediate 21,360 (1,086) 64 3,843 24,181 Agribusiness 18,761 (1,337) 161 6,086 23,671 Communications 5 0 0 (4) 1 Energy & Water/Waste water 360 (1,264) 0 981 77 Rural residential real estate 297 0 0 87 384 Total $ 55,395 $ (6,034) $ 225 $ 15,000 $ 64,586

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NOTE 4 – Investment in CoBank, ACB

At December 31, 2012, the Association’s investment in CoBank,ACB is in the form of Class E stock. The Association is requiredto invest in the ACB for two purposes.

First, the Association is required to invest in the ACB tocapitalize the Association’s loan from the ACB. The capitalizationrequirement for this purpose is 4% of the average borrowings forthe previous year. For 2012, the required investment in the ACBfor this purpose was $151.1 million and the actual investment was$151.1 million. When the Association’s investment meets orexceeds the required amount, the ACB pays patronage to theAssociation 100% in cash. If the Association’s investment in theACB is less than the required amount, the ACB will issueadditional equity through their patronage program until we reachthe required amount. The Association elected to purchase $6.5million of Class E stock in December 2012 to meet the requiredcapitalization level and continue to receive cash patronage.Second, the Association is required to invest in the ACB tocapitalize any participation loans sold to the ACB. Thecapitalization requirement for this purpose is 8% of the previousten years’ average participations sold. For 2012, the requiredinvestment in the ACB for this purpose was $10.0 million and theactual investment was $5.5 million. When the Association’sinvestment is less than the required amount, the ACB payspatronage to the Association 75% in cash and 25% in stock.

In addition to the required stock investment, the Associationpurchased during 2004 and 2003 an investment of participationcertificates in the ACB with a balance of $292 at December 31,2012. This equity, which does not count toward eithercapitalization requirement above, is expected to be redeemed incash in the future.

The Association owns 6.0% of the issued stock of the ACB as ofDecember 31, 2012. As of that date, the ACB’s assets totaled$92.5 billion and members’ equity totaled $6.4 billion. The ACBearned net income of $853.9 million during 2012.

NOTE 5 – Premises and Equipment

Premises and equipment consists of the following:

As of December 31 2012 2011 2010 Land $ 939 $ 1,039 $ 1,039 Buildings and improvements 17,896 17,626 17,432 Furniture and equipment 6,563 6,392 6,360 Autos 3,974 3,838 3,419 Construction in progress 45 0 0 Less: accumulated depreciation 13,918 12,313 10,686 Total $ 15,499 $ 16,582 $ 17,564

NOTE 6 – Notes Payable to CoBank, ACB

The Association’s indebtedness to CoBank representsborrowings by the Association to fund its loan portfolio. Thisindebtedness is collateralized by a pledge of substantially all ofthe Association’s assets and is governed by a General FinancingAgreement (GFA). The GFA and promissory note are subject toperiodic renewals in the normal course of business. TheAssociation was in compliance with the terms and conditions ofthe GFA as of December 31, 2012. Substantially all borrowerloans are match-funded with CoBank. Payments anddisbursements are made on the note payable to CoBank on thesame basis the Association collects payments from anddisburses on borrower loans. The interest rate may periodicallybe adjusted by CoBank based on the terms and conditions of theborrowing. The weighted average interest rate was 1.19% for theyear ended December 31, 2012, compared with 1.38% at December31, 2011, and 1.39% at December 31, 2010.

CoBank, consistent with FCA regulations, has establishedlimitations on the Association’s ability to borrow funds based onspecified factors or formulas relating primarily to credit qualityand financial condition. At December 31, 2012, the Association’snotes payable are within the specified limitations.

NOTE 7 – Members’ Equity

A description of the Association’s capitalization requirements,protection mechanisms, regulatory capitalization requirementsand restrictions, and equities are provided below. Members’equity is described and governed by the Association’scapitalization policies. Farm Credit East’s capitalization policiesare specified in the Bylaws and in the Capitalization Planapproved by the Board of Directors. Copies of the Association’sBylaws and Capitalization Plan are available to members at anytime.

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The components of Association capital that are allocated directlyto members are capital stock, participation certificates, andallocated surplus.

Capital stock and participation certificatesIn accordance with the Farm Credit Act, and the Association’scapitalization Bylaws and Capitalization Plan, each Associationborrower, as a condition of borrowing, is required at the time theloan is made, to invest in Class B Stock for agricultural loans orClass B Participation Certificates for country home and farmrelated business loans. Association Bylaws require thatborrowers acquire capital stock or participation certificates, as acondition of borrowing, at least the lesser of $1,000 or 2% of theamount of the loan, and not more than 10% of the amount of theloan.

Pursuant to the Association Capitalization Plan, the AssociationBoard has determined that Class B stock and Class Bparticipation certificates shall be issued as follows:

For all loans (except where indicated below) Class B stock andClass B participation certificates shall be issued equal to onethousand dollars per customer as a condition of borrowing fromthis Association. For purposes of borrower stock, a customer isdefined as the primary borrower on a loan. The intent of thispolicy is for each primary customer to have one thousand dollarsof stock, regardless of the number of loans or balance on thoseloans to that customer. Stock shall be purchased at thebeginning of a customer’s relationship and will not be retireduntil all loans to that customer are paid in full and there are nofunds available for advances.Exceptions to this policy are:

• At the time of the Farm Credit East merger (January2010), certain customers with less than one thousanddollars of stock were “grandfathered” at the stock levelat conversion. Grandfathered customer stock will befrozen at converted levels until all loans are repaid, atwhich time the stock will be retired, or increased to onethousand dollars at the time of a future advance orcredit action.

• Certain small borrowers (customers with totalcommitment less than ten thousand dollars initially) willbe issued at 10% of the initial commitment, consistentwith By-Law limitations.

• Certain interests in loans sold to other financialinstitutions.

• Loans to be sold into the secondary market

The borrower acquires ownership of the capital stock orparticipation certificates at the time the loan is made, but usuallydoes not make a cash investment. The aggregate par value isadded to the principal amount of the related loan obligation. TheAssociation retains a first lien on the stock or participationcertificates owned by borrowers. Retirement of such equities willgenerally be at the lower of par or book value, and repayment of aloan does not automatically result in retirement of thecorresponding stock or participation certificates. All stock andparticipation certificates are retired at the discretion of theAssociation’s Board of Directors after considering thecapitalization plan as well as regulatory and other requirements.

Regulatory capitalization requirements and restrictionsFCA’s capital adequacy regulations require the Association toachieve permanent capital of seven percent (7.0%) of risk-adjusted assets and off-balance-sheet commitments. Failure tomeet the 7.0% capital requirement can initiate certain mandatoryand possibly additional discretionary actions by FCA that, ifundertaken, could have a direct material effect on theAssociation’s financial statements. The Association is prohibitedfrom reducing permanent capital by retiring stock or makingcertain other distributions to shareholders unless prescribedcapital standards are met. FCA regulations also require thatadditional minimum standards for capital be achieved. Thesestandards are summarized below:

FCA Regulatory Minimum

Ratios at December 31,

2012 Permanent Capital Ratio 7.0% 15.62% Total Surplus Ratio 7.0% 15.36% Core Surplus Ratio 3.5% 15.36%

With respect to participation loans, the amount of participationcertificates purchased and sold between Associations or anAssociation and CoBank may be negotiated within bylaw limitsor may be undercapitalized with suitable negotiatedcompensation to the participating entity.

An FCA regulation empowers it to direct a transfer of funds orequities by one or more System institutions to another System

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institution under specified circumstances. The Association hasnot been called upon to initiate any transfers and is not aware ofany proposed action under this regulation.

Description of equitiesEach owner or joint owners of Class B stock are entitled to asingle vote, while Class B participation certificates provide novoting rights to their owners. Voting stock may not betransferred to another person unless such person is eligible tohold voting stock. At December 31, 2012, the Association had2,276,284 shares of Class B stock outstanding at a par value of $5per share, 243,383 shares of Class B participation certificatesoutstanding at a par value of $5 per share, and 708 shares ofClass C stock outstanding at a par value of $5 per share.

Ownership of stock, participation certificates, or allocatedsurplus is sometimes subject to certain risks that could result in apartial or complete loss. These risks include excessive levels ofloan losses experienced by the Association, losses resulting fromcontractual and statutory obligations, impairment of ACB stockowned by the Association, losses resulting from adverse judicialdecisions or other losses that may arise in the course ofbusiness. In the event of such impairment, borrowers wouldremain liable for the full amount of their loans.

Any losses which result in impairment of capital stock andparticipation certificates would be allocated to such purchasedcapital on a pro rata basis impairing Class B stock andparticipation certificates. In the case of liquidation or dissolutionof the Association, capital stock, participation certificates andallocated surplus would be utilized as necessary to satisfy anyremaining obligations in excess of the amounts realized on thesale or liquidation of assets.

Patronage distributionsAt the end of each year, the Association’s Board of Directorsevaluates whether to retain the Association’s net income tostrengthen its capital position or to distribute a portion of the netincome to customers by declaring a qualified/cash patronagedistribution. Patronage dividends are based on one year’soperating results and are distributed in the subsequent year. Theportion of patronage-sourced net income not distributed in cashis also allocated to patrons in the form of nonqualified writtennotices of allocation. Such allocations may provide a futurebasis for a distribution of capital. These nonqualified writtennotices of allocation are included in unallocated retainedearnings. The Board of Directors considers these unallocated

earnings to be permanently invested in the Association. Thetable below summarizes the qualified/cash patronagedistributions for the years ending December 31, 2012, 2011 and2010. These qualified /cash patronage dividends are distributedin February of the subsequent year.

Earnings

Year

Cash

Distribution 2012 $ 40,000 2011 $ 35,500 2010 $ 35,000

As outlined in the Farm Credit East Capitalization Plan, theAssociation redeemed its remaining $34,846 of allocated retainedearnings. Planned redemptions also occurred in May of 2011 and2010. Allocated retained earnings are retired at the discretion ofthe Association’s Board of Directors after considering thecapitalization plan as well as regulatory and other requirements.

Accumulated Other Comprehensive Income/LossThe Association reports accumulated other comprehensiveincome/loss in its Consolidated Statement of Changes inMembers Equity. Other comprehensive income refers to revenue,expenses, gains and losses that under GAAP are reported as anelement of members’ equity and comprehensive income butexcluded from net income. Other comprehensive income/lossresults from the recognition of the retirement plans netunamortized gains and losses and prior service costs or credits of($36,756), ($32,502) and ($21,566) at December 31, 2012, 2011 and2010, respectively. Also included in accumulated othercomprehensive income/loss is the unrealized holding gain or losson cash flow derivatives of $40, ($231) and $779 at December 31,2012, 2011 and 2010, respectively. There are no other itemsaffecting comprehensive income or loss.

NOTE 8 – Patronage Distribution from Farm CreditInstitutions

Patronage income recognized from Farm Credit Institutions to theAssociation follows:

2012 2011 2010

CoBank $ 18,867 $ 18,010 $ 17,306 Other 347 215 103 Total $ 19,214 $ 18,225 $ 17,409

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Patronage distributed from CoBank was in cash and stock. Theamount declared by CoBank in December 2012 was accrued andwill be paid by CoBank in March 2013. The amount declared inDecember 2011 and December 2010 was paid in March of thesubsequent year.

NOTE 9 – Income Taxes

The provision for income taxes consists of the following:

As of December 31 2012 2011 2010 Current: Federal $ 495 $ 478 $ 832 State 144 150 175 Total current provision for income taxes 639 628 1,007 Deferred: Federal 381 3,236 (3,821) State 74 486 (562) Total deferred (benefit) expense from income taxes 455 3,722 (4,383) Increase (decrease) in deferred tax asset valuation allowance (455) (3,722) 4,069 Provision for income taxes $ 639 $ 628 $ 693

The provision for income tax differs from the amount of incometax determined by applying the applicable U.S. statutory federaltax rate to pretax income as follows:

As of December 31 2012 2011 2010 Federal tax at statutory rate $ 38,562 $ 38,294 $ 35,595 State tax, net 94 98 114 Effect of nontaxable activities (25,607) (23,815) (24,963) Patronage distribution (12,035) (11,403) (13,186) Change in valuation allowance (455) (3,722) 4,069 Other 80 1,176 (936) Provision for income taxes $ 639 $ 628 $ 693

Deferred tax assets and liabilities are comprised of the following:

Based on the Association’s strategic financial plan, primarilyexpected future patronage programs and the tax benefits of theFLCA subsidiary, management believes that as of the end of2012, none of the Association’s net deferred tax assets will berealizable in future periods. Accordingly, a valuation allowance isprovided against the net deferred tax assets since it has beendetermined that it is more likely than not (over 50 percentprobability), based on management’s estimate, that they will notbe realized.

The Association has no unrecognized tax benefits for whichliabilities have been established for the years ended December31, 2012, 2011 and 2010. The Association recognizes interest andpenalties related to unrecognized tax benefits as an adjustment toincome tax expense. The amount of interest recognized was $0and the amount of penalties recognized was $0 for 2012. Thetotal amount of unrecognized tax benefits that, if recognizedwould affect the effective tax rate is $0. The Association did nothave any positions for which it is reasonably possible that thetotal amounts of unrecognized tax benefits will significantlyincrease or decrease within the next 12 months. The tax yearsthat remain open for federal and state income tax jurisdictions are2009 and forward.

As of December 31 2012 2011 2010 Deferred income tax assets: Allowance for loan losses $ 9,659 $ 9,165 $ 10,555 Nonaccrual loan interest 2,201 1,125 779 Credit Mark 0 498 501 Annual leave 678 666 457 Health reserve 295 209 255 Long term incentive 726 689 676 Deferred compensation 687 609 518 Retirement plans 5,181 4,806 2,884 Postretirement benefits other than pensions 602 512 554 Other 17 55 211 Gross deferred tax assets 20,046 18,334 17,390 Less: valuation allowance (14,063) (12,842) (12,334) Deferred tax assets, net 5,983 5,492 5,056 Deferred income tax liabilities: Bank patronage after December 31, 1992 (622) (622) (625) CoBank patronage (3,596) (3,409) (3,427) Depreciation (1,647) (1,369) (922) Deferred gain (118) (92) (82) Gross deferred tax liability (5,983) (5,492) (5,056) Net deferred tax asset $ 0 $ 0 $ 0

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NOTE 10 – Employee Benefit Plans

The Association has employer-funded, qualified defined benefitpension plans, which are noncontributory and cover employeeshired prior to January 1, 2007. Depending on the date of hire,benefits are determined by a formula based on years of serviceand final average pay. Effective January 1, 2007, the Associationclosed the remaining qualified defined benefit pension plan tonew participants.

The Association also has a noncontributory, unfundednonqualified supplemental executive retirement plan (SERP)covering the CEO as of December 31, 2012. The defined benefitpension plans and SERP are collectively referred to asRetirement Plans. The Association holds assets in a trust fundrelated to the SERP; however, such funds remain Associationassets and are not included as plan assets in the accompanyingdisclosures.

The Association has a 401(k) retirement savings plan pursuantto which the Association matches 100% of employees’ electivecontributions up to a maximum employee contribution of 6% ofcompensation. In addition, under this plan, employees hired onor after January 1, 2007 receive additional non-elective employerdefined contributions. The Association contributions to the401(k) retirement savings plan and the employer definedcontribution plan, which are recorded as employeecompensation expense, were $1.7 million for 2012 and $1.6 millionfor 2011 and 2010, respectively.

All retirement-eligible employees are also currently eligible forother postretirement benefits, which primarily include access tohealth care benefits. Substantially all participants pay the fullpremiums associated with these other postretirement health carebenefits. Participant contributions are adjusted annually.

The following table provides a summary of the changes in the Retirement Plans’ projected benefit obligations and fair values of assetsover the three-year period ended December 31, 2012 as well as a statement of funded status as of December 31 of each year.

As of December 31 2012

2011 2010

Change in projected benefit obligation: Projected benefit obligation at beginning of year $ 94,013 $ 82,368 $ 50,327 Service cost 2,686 2,340 2,253 Interest cost 4,380 4,208 4,046 Plan amendments 0 3,362 1,596 Actuarial loss 10,398 5,712 3,302 Special termination benefits 0 0 420 Acquisitions 0 0 22,237 Transfers 0 0 440 Benefits paid (5,768) (3,977) (2,253) Projected benefit obligation at end of year $ 105,709 $ 94,013 $ 82,368 Change in plan assets: Fair value of plan assets at beginning of year $ 81,969 $ 77,853 $ 46,548 Actual return on plan assets 10,329 3,193 6,288 Employer Contributions 6,200 4,900 6,000 Benefits paid (5,768) (3,977) (2,253) Acquisitions 0 0 20,830 Transfers 0 0 440 Fair value of plan assets at end of year $ 92,730 $ 81,969 $ 77,853 Funded status of the plan: Net amount recognized in the balance sheet $ (12,979) $ (12,044) $ (4,515 ) Amounts recognized in accumulated other comprehensive income: Unrecognized prior service cost $ 4,051 $ 4,472 $ 1,174 Unrecognized net actuarial loss 31,279 26,855 19,240 Total $ 35,330 $ 31,327 $ 20,414

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The projected benefit obligation and the accumulated benefitobligation for the Retirement Plans as of year-end are as follows:

As of December 31 2012 2011 2010 Projected Benefit Obligation: Funded plans $ 103,506 $ 92,034 $ 80,760 Unfunded SERP 2,203 1,979 1,608 Total $ 105,709 $ 94,013 $ 82,368 Accumulated Benefit Obligation: Funded plans $ 82,362 $ 75,514 $ 65,342 Unfunded SERP 1,519 1,317 984 Total $ 83,881 $ 76,831 $ 66,326

The $92.7 million in fair value of plan assets shown in a previoustable relates only to the qualified retirement plans. As depicted inthe preceding table, such plans had a projected benefit obligationand an accumulated benefit obligation of $103.5 million and $82.4million, respectively, as of December 31, 2012.

The Association holds assets in trust accounts related to itsSERP plan. Such assets had a fair value of $1.4 million as ofDecember 31, 2012, which is included in “Other Assets” in theaccompanying consolidated balance sheet. Unlike the assetsrelated to the qualified plans, those funds remain Associationassets and would be subject to general creditors in a bankruptcyor liquidation. Accordingly, they are not included as part of theassets shown in a previous table. As depicted in the precedingtable, the SERP plan has a projected benefit obligation and anaccumulated benefit obligation of $2.2 million and $1.5 million,respectively, as of December 31, 2012.

The following table represents the components of net periodicbenefit cost and other amounts recognized in othercomprehensive income as of December 31 as follows:

The Association anticipates that its total pension expense for allretirement plans will be approximately $3.8 million in 2013compared to $3.1 million in 2012. The Association’s estimatedamortizations to be included in accumulated other comprehensiveincome to be approximately $2.8 million in 2013 compared to $2.1million in 2012.

AssumptionsThe Association measures plan obligations and annual expenseusing assumptions designed to reflect future economicconditions. As the bulk of pension benefits will not be paid formany years, the computations of pension expenses and benefitsare based on assumptions about discount rates, estimates ofannual increases in compensation levels, and expected rates ofreturn on plan assets.

The weighted-average rate assumptions used in the measurementof the Association’s benefit obligations are as follows:

As of December 31 2012 2011 2010 Discount rate 4.05% 4.80% 5.35% Rate of compensation increase (qualified plans only) 4.75% 4.75% 5.00%

As of December 31

2012

2011

2010

Net periodic benefit cost

Service cost $ 2,686 $ 2,340 $ 2,253

Interest cost 4,380 4,208 4,046

Expected return on plan assets (5,986) (6,110) (5,510)

Amortization of unrecognized:

Prior service cost (credit) 420 65 (32)

Actuarial loss 1,632 1,014 630

Net periodic benefit cost $ 3,132 $ 1,517 $ 1,387

Plan merger purchase accounting 0 0 7,577

Special termination benefits 0 0 420

Total expense $ 3,132 $ 1,517 $ 9,384

Other Changes in Plan Assets and Benefit Obligation Recognized in Other Comprehensive Income Net actuarial loss $ 6,055 $ 8,629 $ 2,523

Prior service cost 0 3,362 1,597

Amortization of:

Prior service (credit) cost (420) (65) 32

Net actuarial gain (1,632) (1,014) (630) Total recognized in other comprehensive income $ 4,003 $ 10,912 $ 3,522

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The weighted-average rate assumptions used in the measurementof our net periodic benefit cost are as follows:

As of December 31 2012 2011 2010 Discount rate 4.80% 5.35% 5.70% Expected rate of return on plan assets (qualified plans only) 7.25% 8.00% 8.00% Rate of compensation increase (qualified plans only) 4.75% 5.00% 5.00%

Plan AssetsThe asset allocation target ranges for the qualified definedbenefit pension plans follow the investment policy adopted bythe Association’s retirement trust committee. This policyprovides for a certain level of trustee flexibility in selecting targetallocation percentages. The actual asset allocations at December31, 2012, 2011 and 2010 are shown in the following table, alongwith the adopted range for target allocation percentages by assetclass. The actual allocation percentages reflect the quoted marketvalues at year-end and may vary during the course of the year.Plan assets are generally rebalanced to a level within the targetrange each year at the direction of the trustees.

The assets of the qualified defined benefit pension plansconsist primarily of investments in various domestic equity,international equity and bond funds. These funds do notcontain any significant investments in a single entity, industry,country or commodity, thereby mitigating concentration risk.

The following tables presents major categories of plan assetsthat are measured at fair value at December 31, 2012, 2011 and2010 for each of the fair value hierarchy levels as defined inNote 2:

As of December 31, 2012 Level 1 Level 2 Total Asset category Cash $ 284 $ 0 $ 284 Domestic Equity: Large-cap growth fund1 19,295 0 19,295 Large-cap equity fund1 0 15,716 15,716 Small-cap growth fund1 0 4,605 4,605 International Equity: International fund2 9,571 0 9,571 Domestic Fixed Income: Total return fund3 33,843 0 33,843 Emerging Markets: Equity and fixed income fund4 0 4,958 4,958 Real Assets: Gold fund5 4,458 0 4,458

Total $ 67,451 $ 25,279 $ 92,730

1Funds invest primarily in diversified portfolios of common stocks of U.S.companies in various industries, including healthcare, informationtechnology, consumer goods and services, and energy.

2Fund invests primarily in a diversified portfolio of equities of non-U.S.companies in various industries, including financial services, consumergoods, healthcare, industrial materials, technology andtelecommunications.

3Fund invests primarily in a diversified portfolio of investment grade debtsecurities and cash instruments.

4Fund invests in equities and corporate debt securities of companies locatedin emerging international markets. Industries includetelecommunications, information technology and financial services.Fund also invests in the sovereign debt of countries, including Brazil,Argentina, Indonesia and Mexico.

5Fund invests primarily in gold bullion.

As of December 31, 2011 Level 1 Level 2 Total Asset category Cash $ 256 $ 0 $ 256 Domestic Equity: Large-cap growth fund1 18,913 0 18,913 Large-cap equity fund1 0 14,254 14,254 Small-cap growth fund1 0 4,435 4,435 International Equity: International fund2 6,367 0 6,367 Domestic Fixed Income: Total return fund3 29,391 0 29,391 Emerging Markets: Equity and fixed income fund4 0 3,655 3,655 Real Assets: Gold fund5 4,698 0 4,698

Total $ 59,625 $ 22,344 $ 81,969

Percentage of Plan Assets as of December 31,

Target Allocation

Range

2012 2011

2010

Asset Category Domestic Equity 40 – 50% 43% 46% 43% Domestic Fixed Income 35 – 50 37 36 37 International Equity 0 – 10 10 8 10 Emerging Markets Equity and Fixed Income 0 – 10 5 4 4

Real Assets 0 – 5 5 6 6 Total 100% 100% 100% 100%

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As of December 31, 2010 Level 1 Level 2 Total Asset category Cash $ 340 $ 0 $ 340 Domestic Equity: Large-cap growth fund1 16,560 0 16,560 Large-cap equity fund1 0 12,971 12,971 Small-cap growth fund1 0 4,228 4,228 International Equity: International fund2 7,530 0 7,530 Fixed Income: Total return fund3 28,049 0 28,049 Emerging Markets: Equity and fixed income fund4 0 3,872 3,872 Real Assets: Gold fund5 4,303 0 4,303

Total $ 56,782 $ 21,071 $ 77,853

Level 1 plan assets are funds with quoted daily net asset valuesthat are directly observable by market participants. The fair valueof these funds is the net asset value at close of business on thereporting date.

Level 2 plan assets are funds with quoted net asset values that arenot directly observable by market participants. A significantportion of the underlying investments in these funds haveindividually observable market prices, which are utilized by theplan’s trustee to determine a net asset value at close of businesson the reporting date. There were no Level 3 plan assets atDecember 31, 2012.

Expected ContributionsIn 2013 the Association expects to contribute $1.9 million to itsdefined benefit retirement plans and $25 to its trust fund related tothe SERP. The actual 2013 contributions could differ from theestimates.

Estimated Future Benefit PaymentsThe Association expects to make the following benefit paymentsfor its retirement plans, which reflect expected future service, asappropriate. Estimated

Benefit Payouts 2013 Payouts $ 5,667 2014 Payouts 5,780 2015 Payouts 5,856 2016 Payouts 6,111 2017 Payouts 6,286 2018 Payouts to 2022 Payouts 40,231

Other Postretirement BenefitsPostretirement benefits other than pensions (primarily healthcare benefits) are also provided to retirees of the Association.The following table sets forth the funding status and weightedaverage assumptions used to determine post-retirement healthcare benefit obligations.

As of December 31

2012

2011

2010

(Accrued) Postretirement benefit cost $ (110) $ (135) $ (193) Accumulated postretirement benefit obligation $ (1,537) $ (1,310) $ (1,345)

Accumulated other comprehensive loss $ 1,426 $ 1,175 $ 1,152

Net periodic expense $ 136 $ 156 $ 2

Discount rate 4.05% 4.80% 5.35%

Ultimate healthcare trend rate 5.00% 5.00% 5.00%

Substantially all postretirement healthcare plans have noplan assets and are funded on a current basis by employercontributions and retiree premium payments.

The Association anticipates its postretirement benefitsexpense will be approximately $177 in 2013 compared to$136 in 2012.

NOTE 11 – Related Party Transactions

In the ordinary course of business, the Association enters intoloan transactions with directors and senior officers of theAssociation, their immediate families and other organizationswith which such persons may be associated. Such loans aresubject to special approval requirements contained in the FCAregulations and are made on the same terms, including interestrates and collateral, as those prevailing at the time forcomparable transactions with unrelated borrowers.

Loan information to related parties for the years endedDecember 31 is shown below.

2012 2011 2010 New loans $ 14,795 $ 20,057 $ 22,989 Repayments 15,040 21,530 14,827 Other (168) (3,560) (4,765) Ending balance $ 19,604 $ 20,017 $ 25,050

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Other changes to the related party loan balance representchanges in the composition of Association directors and/orsenior officers during 2012. In the opinion of management, noneof these loans outstanding at December 31, 2012 involved morethan a normal risk of collectability and none of these loans are innonaccrual status.

At December 31, 2012, the Association owned a 20.6% interest inFarm Credit Financial Partners, Inc. (FPI). The Associationrecords this investment on the equity method of accounting. FPIcurrently provides accounting, information technology, andother services to the Association on a fee basis. Fees paid to FPIfor the years ended December 31, 2012, 2011 and 2010 were$5,236, $5,284 and $5,288 respectively.

NOTE 12 – Commitments and Contingencies

The Association has various commitments outstanding andcontingent liabilities. The Association may participate infinancial instruments with off-balance-sheet risk to satisfy thefinancing needs of its borrowers and to manage their exposure tointerest-rate risk. These financial instruments includecommitments to extend credit and commercial letters of credit.The instruments involve, to varying degrees, elements of creditrisk in excess of the amount recognized in the financialstatements. Commitments to extend credit are agreements to lendto a borrower as long as there is not a violation of any conditionestablished in the contract. Commercial letters of credit areagreements to pay a beneficiary under conditions specified in theletter of credit. Commitments and letters of credit generally havefixed expiration dates or other termination clauses and mayrequire payment of a fee. At December 31, 2012, $1,610,461 ofcommitments to extend credit, $37,926 of commercial letters ofcredit and $45,801 of standby letters of credit were outstanding.

Since many of these commitments are expected to expire withoutbeing drawn upon, the total commitments do not necessarilyrepresent future cash requirements. However, these credit-related financial instruments have off-balance- sheet credit riskbecause their amounts are not reflected on the Balance Sheetuntil funded or drawn upon. The credit risk associated withissuing commitments and letters of credit is substantially thesame as that involved in extending loans to borrowers andmanagement applies the same credit policies to thesecommitments. Upon fully funding a commitment, the credit riskamounts are equal to the contract amounts, assuming that

borrowers fail completely to meet their obligations and thecollateral or other security is of no value. The amount ofcollateral obtained, if deemed necessary upon extension of credit,is based on management’s credit evaluation of the borrower.Reserves related to unfunded commitments to extend credit areincluded in the calculation of the allowance for loan losses.

In addition, actions are pending against the Association in whichclaims for monetary damages are asserted. Based on currentinformation, management and legal counsel are of the opinionthat the ultimate liability, if any, resulting there from, would notbe material in relation to the financial position of the Association.

NOTE 13 – Fair Value Measurements

Accounting guidance defines fair value as the exchange pricethat would be received for an asset or paid to transfer a liability inan orderly transaction between market participants in theprincipal or most advantageous market for the asset or liability.The fair value measurement is not an indication of liquidity. SeeNote 2 for additional information.

Sensitivity to Changes in Significant UnobservableInputsQuoted market prices may not be available for the instrumentspresented below. Accordingly, fair values are based on internalmodels that consider judgments regarding anticipated cashflows, future expected loss experience, current economicconditions, risk characteristics of various financial instruments,and other factors. These estimates involve uncertainties andmatters of judgment, and therefore cannot be determined withprecision. Changes in assumptions could significantly affect theestimates.

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Assets measured at fair value on a non-recurring basis atDecember 31 for each of the fair value hierarchy values aresummarized below:

Financial assets and financial liabilities measured at carrying amounts and not measured at fair value on the Balance Sheet for each ofthe fair value hierarchy values are summarized below:

As of December 31 2012 2011 2010 Carrying Fair Fair Value Carrying Fair Fair Value Carrying Fair Fair Value Amount Value Hierarchy Amount Value Hierarchy Amount Value Hierarchy Financial assets: Loans, net $4,617,714 $4,642,573 Level 3 $4,288,000 $4,386,340 Level 3 $4,219,709 $4,290,986 Level 3 Cash $ 25,332 $ 25,332 Level 1 $ 13,592 $ 13,592 Level 1 $ 12,493 $ 12,493 Level 1 Financial liabilities: Notes payable to ACB $3,956,600 $4,001,559 Level 3 $3,645,745 $3,677,471 Level 3 $3,633,787 $3,667,833 Level 3

Valuation TechniquesAs more fully discussed in Note 2 – Summary of SignificantAccounting Policies, accounting guidance establishes a fair valuehierarchy, which requires an entity to maximize the use of observableinputs and minimize the use of unobservable inputs when measuringfair value. The following represent a brief summary of the valuationtechniques used for the Association’s assets and liabilities.

CashThe carrying value of cash is a reasonable estimate of fair value.

Assets Held in TrustAssets held in trust funds related to deferred compensation andsupplemental retirement plans and are classified within Level 1.These assets include investments that are actively traded and havequoted net asset values that are observable in the marketplace.

LoansFair value is estimated by discounting the expected future cashflows using CoBank’s and/or the Association’s current interestrates at which similar loans would be made to borrowers withsimilar credit risk. The discount rates are based on the District’scurrent loan origination rates as well as management estimates ofcredit risk. Management has no basis to determine whether theestimated fair values presented would be indicative of theassumptions and adjustments that a purchaser of theAssociation’s loans would seek in an actual sale, which could beless.

Other Property OwnedOther property owned is generally classified as Level 3. Theprocess for measuring the fair value of the other property ownedinvolves the use of appraisals or other market-based information.Costs to sell represent transaction costs and are not included asa component of the asset’s fair value. As a result, these fair valuemeasurements fall within Level 3 of the hierarchy.

Quantitative Information about Recurring andNonrecurring Fair Value MeasurementsAssets and liabilities measured at fair value on a recurring basisat December 31 for each of the fair value hierarchy values aresummarized below:

Fair Value Measurement Using

Level 1

Level 2

Level 3 Total Fair

Value Assets: 2012 Derivative assets $ 0 $ 568 $ 0 $ 568 Assets held in trust $ 3,640 $ 0 $ 0 $ 3,640 2011 Derivative assets $ 0 $ 201 $ 0 $ 201 Assets held in trust $ 2,769 $ 0 $ 0 $ 2,769 2010 Derivative assets $ 0 $ 1,159 $ 0 $ 1,159 Assets held in trust $ 2,391 $ 0 $ 0 $ 2,391 Liabilities: 2012 Derivative liabilities $ 0 $ 30 $ 0 $ 30 2011 Derivative liabilities $ 0 $ 415 $ 0 $ 415 2010 Derivative liabilities $ 0 $ 9 $ 0 $ 9

Fair Value Measurement Using

Level 1

Level 2

Level 3 Total Fair

Value Assets:

2012

Impaired loans $ 0 $ 0 $ 70,820 $ 70,820

Other Property Owned $ 0 $ 0 $ 2,649 $ 2,649

Rural Investments, LLC $ 0 $ 0 $ 3,442 $ 3,442 2011 Impaired loans $ 0 $ 0 $ 49,297 $ 49,297

Other Property Owned $ 0 $ 0 $ 3,586 $ 3,586

Rural Investments, LLC $ 0 $ 0 $ 4,189 $ 4,189

2010

Impaired loans $ 0 $ 0 $ 49,478 $ 49,478

Other Property Owned $ 0 $ 0 $ 2,802 $ 2,802

Rural Investments, LLC $ 0 $ 0 $ 6,385 $ 6,385

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Impaired LoansFor certain loans evaluated for impairment under FASBimpairment guidance, the fair value is based upon the underlyingcollateral since the loans are collateral-dependent loans for whichreal estate is the collateral. The fair value measurement processuses independent appraisals and other market-based information,but in many cases it also requires significant input based onmanagement’s knowledge of and judgment about current marketconditions, specific issues relating to the collateral and othermatters. As a result, these fair value measurements fall withinLevel 3 of the hierarchy. When the value of the real estate, lessestimated costs to sell, is less than the principal balance of theloan, a specific reserve is established.

Notes payable to CoBank, ACBThe notes payable are segregated into pricing pools according tothe types and terms of the loans (or other assets) which theyfund. Fair value of the note payable is estimated by discountingthe anticipated cash flows of each pricing pool using the currentrate that would be charged for additional borrowings. Forpurposes of this estimate it is assumed the cash flow on thenotes is equal to the principal payments on the Association’sloan receivables plus accrued interest on the notes payable. Thisassumption implies that earnings on the Association’s interestmargin are used to fund operating expenses and capitalexpenditures.

Rural Investments, LLCFor these investments, the fair value is based upon theunderlying loans contained in the investment. The fair valuemeasurement process uses independent appraisals and othermarket-based information, but in many cases it also requiressignificant input based on management’s knowledge of andjudgment about current market conditions, specific issuesrelating to the collateral and other matters. As a result, these fairvalue measurements fall within Level 3 of the hierarchy. Whenthe value of the collateral is less than the principal balance of theinvestment a loss is realized.

DerivativesExchange-traded derivatives valued using quoted prices areclassified within Level 1 of the valuation hierarchy. However, fewclasses of derivative contracts are listed on an exchange; thus,the Association’s derivative positions are valued using internallydeveloped models that use as their basis readily observablemarket parameters and are classified within Level 2 of the

valuation hierarchy. Such derivatives include basic interest rateswaps. Derivatives that are valued based upon models withsignificant unobservable market parameters and that are normallytraded less actively or have trade activity that is one way areclassified within Level 3 of the valuation hierarchy. TheAssociation does not have any derivatives classified withinLevel 3.

The models used to determine the fair value of derivative assetsand liabilities use an income approach based on observablemarket inputs, primarily the LIBOR swap curve and volatilityassumptions about future interest rate movements.

NOTE 14 – Investments

On August 26, 2005, the Association entered into an agreementwith Rural Investments, LLC (a Delaware Limited LiabilityCompany) to service and collect a securitized pool of agriculturalloans sold by a commercial lender located in the Association’sterritory (the investment). The investment is comprised of loanswith characteristics similar to loans contained in theAssociation’s loan portfolio. To effect this agreement, theAssociation purchased a security issued by Rural Investments,LLC which is collateralized by all the assets (loans) and theunderlying collateral securing the loans purchased by RuralInvestments, LLC. The agreement assigns all the benefits andrisk associated with the investment and names the Associationas the sole Manager of the LLC. The security purchased onAugust 26, 2005 totaled $20,702. Subsequent to the initialpurchase additional purchases were made and the totalinvestments purchased through December 31, 2005 were $22,646.The Association was given authority to purchase additionalsecurities for a period of one year from the date of initialpurchase. Additional purchases totaling $704 were made underthe authority during 2006. Rural Investments, LLC invested $490as a minority member of Genesee Agribusiness LLC (GALLC) onNovember 7, 2008. GALLC is an agribusiness industrialdevelopment park located in town of Batavia, Genesee County,NY. The fair market value of securities and investment in RuralInvestment, LLC at December 31, 2012 is $3,442 and theAssociation recorded $656 of interest income on the investmentin 2012.

The quality of the investment is acceptable based on currentvaluations performed by management. In addition, theAssociation makes monthly assessments regarding the

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performance status of each of the underlying loans contained inthe security purchased from Rural Investments, LLC. Thisquality assessment is made in a similar manner as that made onloans in the Association’s core portfolio. Investmentsperforming according to the contractual terms of the underlyingnotes are carried in accruing status. Investments that are notperforming or where there is some question as to the fullcollectability of the underlying loans are carried as nonaccrual/impaired.

Underlying impaired loans contained in the investment are thosewhere it is probable that not all principal and interest will becollected according to the terms of the underlying loan. Impairedinvestments include those identified as nonaccrual or 90 dayspast due. No allowance is provided on the investment. Thevaluation determines the fair market value of the underlying loancontained in the investment and if it is less than the currentcarrying value of the underlying loan contained in the investmentno additional income is recorded until all payments are receivedunder the terms of the loan.

The following table presents information illustrating theinvestment amounts and the performance status of theunderlying loans contained in the investment that would havebeen included in the Association’s performance categories hadthe loans been owned by the Association:

As of December 31 2012 Fair Value of Investments Accruing investments $ 3,163 Nonaccrual/Impaired investments 279 Total investment value $ 3,442 Allowance on underlying impaired loans Underlying impaired loans with a related allowance $ 0 Underlying impaired loans with no related allowance 279 Total underlying impaired loans $ 279

NOTE 15 – Derivative Instruments and HedgingActivities

The Association maintains an overall interest rate riskmanagement strategy that incorporates the use of derivativeinstruments to minimize significant unplanned fluctuations inearnings that are caused by interest rate volatility. TheAssociation’s goal is to manage interest rate sensitivity bymodifying the repricing or maturity characteristics of certainbalance sheet assets or liabilities so that the net interest margin isnot adversely affected by movements in interest rates. As a

result of interest rate fluctuations, the Association’s interestincome and interest expense of hedged variable-rate assets, willincrease or decrease. The effect of this variability in earnings isexpected to be substantially offset by the Association’s gainsand losses on the derivative instruments that are linked to thesehedged assets. The Association considers its strategic use ofderivatives to be a prudent method of managing interest ratesensitivity, as it prevents earnings from being exposed to unduerisk posed by changes in interest rates.

The Association enters into interest rate swaps to stabilize netinterest income on variable priced loan assets, to the extent theyare funded with equity. Under interest rate swap arrangements,the Association agrees with other parties (CoBank) to exchange,at specified intervals, payment streams calculated on a specifiednotional principal amount, with at least one stream based on aspecified floating rate index.

The Association’s interest-earning assets, to the degree they arefunded with debt, are matched with similarly priced and termedliabilities. Volatility in net interest income, comes from equityfunded, variable priced assets. To the degree that variable pricedassets are funded with equity, interest rate swaps in which theAssociation pays the floating rate and receives the fixed rate(receive fixed swaps) are used to reduce the impact of marketfluctuations on the Association’s net interest income.

By using derivative instruments, the Association exposes itselfto credit and market risk. If a counterparty fails to fulfill itsperformance obligations under a derivative contract, theAssociation’s credit risk will equal the fair value gain in aderivative. Generally, when the fair value of a derivative contractis positive, this indicates that the counterparty owes theAssociation, thus creating a repayment risk for the Association.When the fair value of the derivative contract is negative, theAssociation owes the counterparty and, therefore, assumes norepayment risk. The Association minimizes the credit (orrepayment) risk by entering into transactions only with CoBank,its funding bank. The Association’s derivative activities aremonitored by senior management and the Board of Directors.

Cash flow hedgesThe Association uses interest rate swaps to hedge the risk ofoverall changes in the cash flows of an asset. The asset isdefined as a pool of long term variable rate loans equal to thenotional amount of the swaps, and not exceeding the

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Association’s equity position. These swaps, which qualify forhedge accounting, have up to a three-year term, with a pay rateindexed to three month LIBOR.

As of December 31, 2012, the Association has executed interestrate swap contracts with CoBank, ACB having a notional amountof $400 million. The fair value of the swap contracts at December31, 2012 is $538 of which $40 is reflected in accumulated othercomprehensive income due to the highly effective nature of thehedge transaction and $498 of income is recorded in interestexpense due to the ineffectiveness of the hedge transactions.The carrying value of the hedged assets was $568 and thecarrying value of the hedged liabilities was $30. The Associationis exposed to credit loss in the event of nonperformance by otherparties to the interest rate swap agreement; however, theAssociation does not anticipate nonperformance by CoBank,ACB.

NOTE 16 – Subsequent Events

The Association has evaluated subsequent events throughMarch 5, 2013 which is the date the financial statements wereissued or available to be issued.

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Board of Director DisclosuresBoard StructureThe Board consists of twelve elected directors with four electedfrom each of the three nominating regions and three appointeddirectors. There will be two open director seats in the 2013election cycle - one each from the Eastern and WesternNominating Regions. To maintain staggered terms going forward,there is no open seat in the Central Region to be filled during2013. There will continue to be four elected directors from thatregion and in 2014 two of those seats will be open – one for afour year term and one for a three-year term.

The Farm Credit East Bylaws specify 4-year terms with a limit offour consecutive terms. There will be one seat from each Regionopen for election each year. The Bylaws also specify the directorcandidates be nominated by Region and be elected by the entiremembership. There are three approximately equal NominatingRegions as shown on the map on the inside back cover of thisAnnual Report. The Board may appoint up to four directors, twoof which must be outside directors, i.e., not have a borrowing orother business relationship with Farm Credit East.

The Board is independent of management. The CEO reports tothe Board and no management or employees may serve asdirectors within one year of employment. The Board generallyhas seven regularly scheduled meetings each year and hasestablished a number of committees to provide concentratedfocus and expertise in particular areas and to enhance the overallefficiency of scheduled Board meetings. Each committee createdby the Board prepares a charter outlining the committee’spurpose, its duties, responsibilities and authorities. AllCommittees report on their meetings at the regular meeting of thefull Board. Minutes of each Committee meeting are documentedand approved at the following meeting. The full text of eachcommittee charter is available on our website under “BoardCommittees” at www.Farmcrediteast.com.

Association bylaws also established an Executive Committeewhich also functions as the Board’s Executive CompensationCommittee. The Board has established the following standingcommittees: an Audit Committee, Governance Committee, andan Ag Initiatives Committee. The primary responsibilities ofeach Board Committee are described as follows:

Executive CommitteeThe Executive Committee members consist of the boardchairman, vice chairman and two other directors designated bythe Board, each representing a nominating region other thanthose represented by the chairman or vice chairman. If thechairman and vice chairman are from different regions then oneof the other directors will be at-large.

The committee is primarily responsible for providing input anddirection to management on the development andimplementation of the Association’s strategic plan, policies andother significant matters requiring attention between boardmeetings. The committee also acts as the liaison with theAssociation’s regulator, the FCA.

The Executive Committee, along with another appointed director,also functions as the Board’s Compensation Committee. Thefunction of this committee is to review the Association’s overallcompensation and benefits packages, including the performanceand compensation for the Chief Executive Officer, and thefunding of these programs.

Audit CommitteeThe audit committee members are appointed by the Boardchairman in consultation with the board officers. All members ofthe Audit Committee are independent of management of FarmCredit East and any other System entity. All committee membersare expected to have practical knowledge of finance andaccounting, be able to read and have a working understandingof financial statements, or develop that understanding within areasonable period of time after being appointed to theCommittee. Ann P. Hudson was appointed to the Board ofDirectors in May 2006. Her current term expires in 2016. TheBoard has determined that Ms. Hudson has the qualificationsand experience necessary to serve as the Audit Committee“financial expert,” as defined by FCA regulations, and has beendesignated as such.

The Audit Committee has unrestricted access to representativesof the internal audit and risk management departments, financialmanagement and our independent auditors. The primarypurpose of the Audit Committee is to assist the Board infulfilling its oversight responsibilities related to accountingpolicies, internal controls, financial reporting practices andregulatory requirements.

The Audit Committee pre-approves all audit and audit-relatedservices and permitted nonaudit services (including the fees andterms thereof) to be performed for the Association by itsindependent auditors, as negotiated by management. Aggregatefees incurred by the Association for services rendered by itsindependent auditors, PricewaterhouseCoopers, LLP for theyears ended December 31, 2012 and 2011 follow:

For the year ended December 31 2012 2011 Audit Fees $ 93,600 $ 93,600 Audit - Related 0 5,000 Tax Fees 30,000 41,837 Total $ 123,600 $ 140,437

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The 2011 tax fees include services rendered in connection withan IRS examination. The 2011 audit related fees include servicesrendered in connection with the merger.

Governance CommitteeThe Governance Committee members are appointed by the boardchairman in consultation with the board officers. The committeeis primarily responsible for the training and education of Boardmembers, the outside director election process, directorcompensation, ethics, and conflict of interest matters.

Ag Initiatives CommitteeThe Ag Initiative Committee members are appointed by theboard chairman in consultation with the board officers. Thecommittee is primarily responsible for directing the Association’slending and financial services program for Young, Beginning,and Small farmers to support the development of agriculture withfinancial incentives and educational opportunities; representFarm Credit East on the governing council of FarmStart, LLP andoversee the Association’s scholarship program.

Other Committees

Nominating CommitteeThe Nominating Committee is comprised of one member and analternative member from each branch office, who are electedeach year by the membership at the annual stockholder meeting.This committee, which consists of customers who are not seatedon the Board of Directors, proactively identifies qualifiedcandidates for Board membership and reviews directornominations, helping to ensure that the Association continuesto attract a highly qualified and diverse Board. The NominatingCommittee makes a best effort to recommend at least twocandidates for each open Board position. Stockholders andinterested candidates may gather signatures for petitions to runfor the Board following the conclusion of the NominatingCommittee’s work.

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Farm Credit East DirectorsInformation regarding directors who served as of December 31,2012, including business experience in the last five years andany other business interest where a director serves on the boardof directors or as a senior officer follows:

Andrew J. Gilbert, Potsdam, NY, became Chairman of the FarmCredit East Board in 2012 and has served as a director since2005 with his current term expiring in 2014. He is a member of theBoard’s Executive and Compensation Committee. He alsoserved as director of Farm Credit Council, a national tradeassociation. Andy and his brother Tony own and operate AdonFarms, a 1,200-cow dairy. They grow corn for grain, grow alltheir forages, and haul their own milk. They also own andoperate Parishville Sand and Gravel with their cousin DonaldSnyder also a Farm Credit member.

Matthew W. Beaton, East Sandwich, MA, became ViceChairman of the Farm Credit East Board in 2012 and hasserved as director since 2006 and his current term expires in2016. He is a member of the Board’s Executive andCompensation Committees. Matt is president and owner ofSure-Cran Services, Inc., a custom management companymanaging over 550 acres of cranberry bogs in southeasternMassachusetts. Matt is also president and co-owner ofBeaton’s, Inc., which owns and manages 150 acres of cranberrybogs. Matt is Chairman of the Cape Cod Growers Association’sEnvironmental Committee.

Henry Adams III, Shortsville, NY has served as director since1997 and he will reach term limit in 2013. He previously servedas Vice Chairman of the Farm Credit East Board, havingpreviously served as Chairman of the Farm Credit of WesternNew York Board. He is a member of the Board’s GovernanceCommittee. Hal and his wife Kerry operate Black Brook Farm, a190-cow dairy with 490 crop acres. He is a delegate and FinanceCommittee member of the Upstate Niagara Cooperative, Inc.

Robert R. Brown II, Waterport, NY was elected to the FarmCredit of Western New York Board in 2002. His current termexpires in 2015. He is Chairman of the Board’s Ag InitiativeCommittee. Bob along with his brother Eric and son Bobby,operate Orchard Dale Fruit Farms, Inc., growing 300 acres offruits and berries. Bob and his wife Deborah also operateBrown’s Berry Patch with pick-your-own berries, apples, cherriesand pumpkins, along with a variety of other retail offerings. Bobis a partner of Lake Ontario Fruit Company that stores, packsand ships fresh apples from western New York growers.

Samuel G. Conard, Hillsborough, NJ has served as director since2011 with his current term expiring in 2014. Sam owns andoperates S.R. Conard & Sons, LLC, a 1,100 acre hay and grainfarm in Hillsborough, New Jersey. The bulk of their hay andlong straw production is marketed to horse farms in central NewJersey as well as to garden centers and landscapers. They alsooperate a transportation business which delivers their productsas well as livestock and equipment for other customers. He alsoserves on the board of directors for the Belle Mead FarmersCooperative, a local farm supply business. He also currentlyserves with other organizations including the New Jersey FarmBureau of Somerset County (board of directors), SomersetCounty Board of Agriculture, Princeton Agricultural Society andHillsborough Township Agricultural Advisory Committee andthe Hillsborough Township Planning Board.

Christine E. Fesko, Skaneateles, NY, has served as a directorsince 2003 with her current term expiring in 2016. She isChairperson of the Board’s Governance Committee. Chris, alongwith her daughter Kim and son in law Eric Brayman operateFesko Farms, Inc., a 600-cow dairy. Chris Fesko Enterprisesproduces educational videos for schools and the general publicnationwide. Chris owns the Farm Discovery Center, aneducational facility for urban children to experience math,science and language arts in a barn setting as a school field trip.

Benjamin J. Freund, East Canaan, CT, has served as directorsince 2001 and his current term expires in 2014. He hadpreviously served as Vice Chairman of the First Pioneer Boardand currently serves as Chair of the Audit Committee. Ben andhis brother Matthew own and operate Freund’s Farm, Inc., a 250-cow dairy farm with 650 acres of pasture, corn, and hay, and alsomanufacture CowPotstm, a horticultural planting containermanufactured from composted manure solids. Ben serves asSecretary/Treasurer of the Canaan Valley AgriculturalCooperative.

Laurie K. Griffen, Schuylervile, NY has served as director since2011 with her current term expiring in 2015. Laurie is co-owner-operator of Saratoga Sod Farm, Inc., a 600-acre turfgrass farm inStillwater, New York. In addition to producing and selling its highquality products, Saratoga Sod also provides installation servicesas well as sales of seed and fertilizer to assist its customers acrossthe Northeast. Saratoga Sod also grows roughly 500 acres ofsoybeans and corn as part of the crop rotation. She is in businesswith her husband Steve. She also serves on the Town of SaratogaPlanning Board, Schuyler Park Committee (Co-chair), LEAD NewYork Board of Directors, the New York State Ag Experiment StationAdvisory Committee and the NY Farm Bureau Labor Committee.

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June W. Hoeflich, Williamsville, NY has served as outsidedirector since 2006 with her current term expiring in 2014. Juneis a member of the Board’s Audit, Executive and CompensationCommittees. She is a retired Senior Bank Executive from HSBCBank, USA, and former hospital CEO and President. Junecurrently serves on the Board of Roswell Park Cancer InstituteBoard of Trustees, Blue Cross Blue Shield of WNY and theSUNY Buffalo President’s Council.

Ann P. Hudson, Suffield, CT, was first appointed to a three-yearterm as outside director in May of 2006 and has been reappointedto a term expiring in 2016. She is a member of the Board’s AuditCommittee. Ann has had a career in public accounting startingwith Price Waterhouse and progressing as partner with taxexpertise through two other accounting firms. Currently anindependent consultant and part-time farmer, she is a member ofthe Board of Directors and chairwoman of the Audit Committee atThe New England College of Optometry.

Henry L. Huntington, Loudon, NH has served as director since2011 with his current term expiring in 2015. He is a member ofthe Board’s Audit and Compensation Committees. Henry is CEOof Pleasant View Gardens, Inc. of Loudon, NH. Pleasant ViewGardens is a 12-acre wholesale greenhouse operation specializingin young plant propagation and finished annuals and perennials.The company was founded by parents Jonathan and Eleanor and iscurrently owned by Henry and his brother Jeffrey. They are alsopartners in Proven Winners, LLC, a plant brand marketingcompany; Plant 21, LLC, a plant breeding company; and Ticoplantof Costa Rica, an offshore unrooted cutting production company.He is a director of Phenix Mutual Insurance Company based inConcord, NH; co-chair of the New Hampshire OrnamentalHorticulture Endowment; member of the Leadership AdvisoryBoard for the Thompson School, University of New Hampshire;past president of Bedding Plants International; and a 14-yearmember of the Planning Board for the Town of Loudon.

Richard P. Janiga, East Aurora, NY has served as director since2000 with his current term expiring in 2014. He had previouslyserved as Vice Chairman of the Board in 2011. He is a member ofthe Board’s Audit, Compensation and Executive Committees. Hewas previously Vice Chairman of the Board of Farm Credit ofWestern New York Board. Rick owns and operates R + D JanigaEnterprises, LLC a 300-cow dairy, cash crop and custom harvestoperation. He serves on the Town of Marilla Planning Board andthe Upstate Niagara Milk Cooperative Board of Delegates.

Peggy Jo Jones, Boise, ID, was appointed as outside director inMarch 2008 and was reappointed to a term expiring in 2015. Sheserves on the Board’s Compensation and Ag InitiativeCommittees. She is a consultant providing training and humanresources services to Albertsons, LLC, a major food and drugretailer. In addition to extensive management experience in thefood retailing industry, Peggy’s professional profile also includeshaving previously been a director and chair of the board ofdirectors for Northwest Farm Credit Services, ACA.

Abbott W. Lee, Chatsworth, NJ, has served as director since 2001with his current term expiring in 2013. He had previously servedas Chairman of the Board of Farm Credit East and as wellpreviously serving as Chairman of the First Pioneer Board. He isa member of the Board’s Governance Committee. Abbott is thefounder and owner of Integrity Propagation, LLC the cranberryindustry’s only foundation level nursery. Previously he was apartner in Lee Brothers, Inc., a six generation family blueberry-cranberry farm.

Douglas W. Shelmidine, Adams, NY, has served as directorsince 2012 with his current term expiring in 2016. He is a memberof the Board’s Ag Initiative Committee. Doug owns ShelandFarms which is a multi-generational family business run inpartnership with his brother Todd and father Donald. Thefamily farms 1,500 acres and milks 700 cows. Doug is currentlyserving his fifth two-year term on the USDA-NRCS AgriculturalAir Quality Task Force and also chairs the Jefferson CountyAgriculture and Farmland Protection Board.

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Director CompensationDirectors were compensated at a per diem rate of $650 for each day or any part thereof served, $650 for each day traveled before andafter the meeting, $650 for board meeting preparation time ($975 for Board Chairman) and a per diem rate of $650, approved in advance,for special assignments. In addition, Directors were compensated at a per diem rate of $650 for each day or any part thereof served ona Board committee not held in conjunction with a Board meeting. Directors also received an annual retainer of $11,600 ($14,450 and$13,300 respectively for Board Chairman and Vice Chairman) plus reimbursement of related travel expenses. Directors can elect todefer compensation through a nonqualified deferred compensation plan. Total compensation paid to the directors as a group during2012 was $577,025. Additional information for each director who served during 2012 is provided below. The Committee Meetingscompensation represents payment for meetings held outside of the regular scheduled board meeting dates.

Current Farm Credit East policy regarding reimbursements for travel, subsistence, and other related expenses provides forreimbursement of actual reasonable out of pocket expenses incurred while traveling on official Association business. Directors whouse their own automobiles for Association business purposes will be reimbursed at a rate that has been established in accordancewith IRS guidelines. The aggregate amount of reimbursement for travel, subsistence and other related expenses for all directors as agroup was $256,715, $239,897 and $259,858 for 2012, 2011, and 2010, respectively. A copy of the Association travel policy is availableto stockholders upon request.

Transactions with DirectorsAt December 31, 2012, the Association had loans outstanding with directors individually and to the business organizations ofdirectors. All of the loans were in the ordinary course of business and remain on the same terms, including interest rates, amortizationschedules, and collateral as those prevailing at the time for comparable transactions with other persons and did not involve more thanthe normal risk collectability. Information regarding related party transactions is incorporated herein by reference from Note 11 of theconsolidated financial statements included in this annual report to stockholders.

Days Served Compensation

Director Board

Meetings

Other Official

Activities

Committee

Meetings Total Henry Adams III 14 0 $ 0 $ 30,450 Matthew W. Beaton 14 11 650 41,250 Robert R. Brown II 14 6 0 36,300 Samuel G. Conard 14 9 0 37,600 Christine E. Fesko 14 4 1,950 32,400 Benjamin J. Freund 14 18 3,250 40,200 Andrew J. Gilbert * 14 34 650 53,150 Laurie K. Griffen 14 6 0 31,100 June W. Hoeflich 14 9 3,250 36,950 Ann P. Hudson 14 5 3,250 33,050 Henry L. Huntington 14 8 3,250 35,650 Richard P. Janiga 14 18 1,950 46,050 Peggy Jo Jones 14 8 2,600 38,250 Abbott W. Lee 14 8 1,300 38,575 Charles R. Miller2 3 2 650 5,200 Sandra K. Prokop2 3 5 0 9,100 Peter J. Russell2 3 2 0 5,850 Douglas Shelmidine1 11 0 0 25,900 Total $ 22,750 $ 577,025

1 Term began during year 2 Term ended during year * This director represented Farm Credit East’s interest by serving on boards of other

organizations important to the Association. Days of service related to these activities and any compensation received (if any) are not included in this report.

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Senior Officer Disclosures

Senior OfficersListed below are the CEO and senior officers of Farm Credit East,ACA. Information is provided on their experience, as well as onany business for which they serve on the board of directors oract as a senior officer and the primary business that organizationis engaged in.

William J. Lipinski serves as Chief Executive Officer a positionheld since Farm Credit East was formed on January 1, 2010. Hewas previously President and CEO of First Pioneer Farm Credit.He reports to and works closely with the Board of Directors. Hesets strategic direction with the Board and directs humanresources, credit and services delivery, finance and customerservice. Bill is a graduate of Cornell University with a degree inAgricultural Economics. Bill began his Farm Credit career in1979 and was promoted through a number of positions beforebecoming CEO. Bill is a current director and past Chairman ofthe Board of Farm Credit Financial Partners, a service companyowned by Farm Credit East and other ACAs. He is a member ofthe Farm Credit System Presidents Planning Committee, anational leadership group. Bill was a former member of theBoard of Directors of Pro-Fac Cooperative, Inc. He also servedas director of the Farm Credit Leasing Corporation for a numberof years.

Charles S. Herring serves as President and Chief OperatingOfficer. Scott chairs Farm Credit East’s Credit Committee, whichacts on large and complex credit decisions. He is responsible forbalancing sound extension of credit and services with highquality customer service. All branch credit and financialservices operations as well as finance and internal control reportthrough Scott. Scott is a graduate of Alfred University with adegree in Business Administration. He joined Farm Credit in1976 and was promoted through several positions includingCEO of the Farm Credit of Western New York prior to its mergerinto Farm Credit East. He serves on the Risk Management WorkGroup a subcommittee of the Presidents Planning Committeeand also the CoBank, ACB Retirement Trust Committee. He alsosits on the Farm Credit East Human Resources Committee.

David W. Boone served as Executive Vice President and RegionalManager, a position held since July 1998. He provides seniormanagement oversight and coaching to the Bridgeton,Claverack, Cobleskill, Flemington and Middletown offices incredit, financial services, consulting and customer service.David is a Farm Credit veteran having joined in 1978 and beenpromoted through a variety of positions. He is a member ofFarm Credit East’s Credit, Human Resources and FinancialServices Committees. He has also active in the New Jersey farmcommunity having served on several boards. David is a Trusteeof the Warren County Community College. Dave retired fromFarm Credit East effective December 31, 2012.

William S. Bathel serves as Executive Vice President and ChiefRisk Officer. Bill is responsible for measuring and monitoringrisk in Farm Credit East’s loan portfolio. He provides reports tothe Board and management to help assure the ACA’s financialsafety. Bill administers the ACA’s credit review, appraisal reviewand internal audit. He leads the Association’s internaltechnology committee and coordinates technology efforts withFinancial Partners Inc. (FPI). Bill also co-directs the ACA’sbusiness planning process and coordinates matters with ourfederal examiner, the Farm Credit Administration. Bill joined theFarm Credit System in 1987 and advanced through severalpositions. Bill is a graduate of the University of Nebraska with adegree in Accounting. He serves on the Farm Credit East CreditCommittee and works closely with the Board’s Audit Committee.

Gary R. Bradley serves as Executive Vice President andRegional Manager. He provides senior management oversightand coaching to the Burrville, Cortland, Greenwich, Potsdam andSangerfield offices in credit, financial services, consulting andcustomer service. Gary joined Farm Credit in 1977 andprogressed through several positions. He serves on the Creditand Human Resources Committees. He also works closely withthe Board’s Ag Initiatives Committee, is a member of the FarmCredit Fellows Committee at Cornell University, and serves as adirector holding the position of treasurer of the AmericanAgriculturalist Foundation. Gary holds a Cornell Universitydegree in Business Management and Marketing.

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John P. Caltabiano serves as Executive Vice President andRegional Manager. He provides senior management oversightand coaching for the Bedford, Dayville, Enfield, Middleboro andRiverhead offices in credit, financial services, consulting andcustomer service. John joined Farm Credit in 1983 andprogressed through a variety of positions, including SouthernNew England Farm Credit, the Farm Credit Banks in Springfield,MA and COBANK in Denver, Colorado. He is a member of FarmCredit East’s Credit, Human Resources and iTEC Committees.He is a graduate of LEAD New York and served as President ofits Board. He is also a Director of the Northeast AgriculturalEducation Foundation. John holds a BS in AgriculturalEconomics & Plant Science from Cornell University and an MBAfrom Duke University.

Brian Monckton serves as Executive Vice President andRegional Manager. He provides senior management oversightand coaching to the Batavia, Geneva, Hornell, and Mayvilleoffices in credit, financial services, consulting and customerservice. Brian joined Farm Credit in 1981 and progressedthrough several positions including Farm Credit of Bridgeton,Farm Credit of Olean, and Farm Credit of Western New York. Heis a member of Farm Credit East’s Credit and Human ResourcesCommittees. He is a graduate of Cornell with a BS in AgriculturalEconomics and a graduate of LEAD New York and currentlyserves on the Board.

Roger E. Murray serves as Executive Vice President andprovides senior management oversight and coaching toCommercial Lending, Country Living and Crop Growers, LLPbusiness units. He has been part of the senior managementteam since 1995. Roger provides program leadership for riskmanagement services, including crop and credit life insuranceand provides program leadership for leasing. He serves on theFarm Credit East’s Credit and Human Resources Committees.Roger holds a Cornell University degree in AgriculturalEconomics and is a current member of the Cornell Agri-BusinessAdvisory Council. He joined Farm Credit in 1981 and has heldseveral positions with predecessor organizations as well as theSpringfield Bank for Cooperative and COBANK in Springfield,MA.

James N. Putnam, II serves as Executive Vice President forMarketing and Planning. Jim co-directs the ACA’s businessplanning process. He is practice manager for businessconsulting services and program leader for farm records, farmsoftware, tax services and new product development.Knowledge Exchange, Customer Communications and PublicAffairs also report through this position. Jim started with FarmCredit in 1975 after earning a BS (University of Massachusetts)and an MS (Iowa State University), both in AgriculturalEconomics. He has been nominated to serve as a RegularTrustee of Eastern States Exposition of West Springfield, MA.

Paul S. Bajgier serves as Senior Vice President and Treasurer.He is responsible for the Association’s general ledger and loanaccounting systems, operational procedures, tax filings andexternal reporting. He also works closely with the Board AuditCommittee to manage Farm Credit East’s relationship withPricewaterhouseCoopers, the Association’s independentauditor. Paul is a CPA and worked for Price Waterhouse for fiveyears before joining Farm Credit in 1992. Paul is a graduate ofWestern New England College with a degree in Accounting. Heis a member of the Farm Credit System Accounting StandardsWork Group.

James D. Miller serves as Senior Vice President of Finance. Heis responsible for the patronage dividend program, loan pricing,asset liability management including funding relationship withCOBANK, budgeting, internal management information, capitalprojects and technology implementation. Since joining FarmCredit in 1981, Jim has had diverse experience in credit, appraisal,risk management and finance. He is a graduate of CornellUniversity with a BS in Agricultural Economics and an MBA inFinance and Accounting. He serves on the CoBank, ACBRetirement Trust Committee and is a Director of the ConnecticutFarmland Trust.

Michael J. O’Connor, III serves as Senior Vice President,General Counsel and Corporate Secretary. He serves the Boardas Corporate Secretary, manages all Farm Credit East’s legalmatters and provides support on complex and innovative loanissues. Mick is a member of the Human Resources Committeesand frequently serves on regional and national task forces. Hecame to Farm Credit in 1988 with the Farm Credit Banks ofSpringfield and later worked for COBANK. He is a graduate ofAmherst College and the University of Connecticut School ofLaw.

Robert H. Reid, Jr. serves as Senior Vice President and HumanResources Director. He leads all of Farm Credit East’s humanresource programs including benefits, recruiting, training andcompensation and is the Association’s auto fleet manager. Bobis Chairman of Farm Credit East’s Human Resources Committeeand serves on the COBANK Welfare Benefits Committee. Hejoined Farm Credit in 1979 and has been promoted throughdiverse positions within Farm Credit East and its predecessors.He is a graduate of the University of Maine with a degree inaccounting.

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Robert A. Smith serves as Senior Vice President for Public Affairsand Knowledge Exchange and Acting Corporate Secretary. Bobjoined Farm Credit East in January 2007. He has responsibility forpublic policy, marketing and communications and Farm CreditEast’s Knowledge Exchange initiative. Prior to joining FarmCredit East, he served as Vice President for GovernmentalRelations for COBANK and was responsible for COBANK’SWashington, DC office. Prior to COBANK, Bob worked as aDeputy Commissioner in the NYS Department of Agriculture andMarkets, and Assistant Secretary to the Governor of New York.Before joining the Department of Agriculture and Markets, Bobserved as Director of Governmental Relations andCommunications for New York Farm Bureau. He is a graduate ofCornell University and LEAD NY and currently serves on theNew York State Fair Advisory Board and the American FarmlandTrust NY Advisory Council.

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Senior Officers Compensation Discussion andAnalysis

Compensation Philosophy and ObjectivesFarm Credit East’s (the Association) compensation strategy is toattract and retain highly talented employees to fulfill our missionas the premier credit and financial services provider in theNortheast. The compensation philosophy seeks to achieve theappropriate balance among market-based salaries, benefits andvariable incentive compensation designed to incent and rewardboth the current and long term achievement of our businessobjectives and business financial plans. We believe thisphilosophy fosters a performance-oriented, results-basedculture wherein compensation varies on the basis of resultsachieved.

Components of Compensation ProgramGiven the cooperative ownership structure of Farm Credit East,no equity or stock based plans are used to compensate anyemployee, including senior officers. Senior officers’compensation consists of four components – salary, short-termincentive plan, long-term incentive plan and retirement benefits– as described below. All employees participate in salary, theshort term incentive plan and retirement benefits, while seniorofficers and specified other key employees are also eligible toparticipate in the long-term incentive plan. All senior officerscan elect to defer long-term incentive payments through anonqualified deferred compensation plan. In addition the CEO iseligible for supplemental retirement benefits (SERP).

SalarySalaries are market based, as determined in consultation with anindependent executive compensation consultant. Thedetermination of market salaries consists of a comparison ofsalary levels to positions of similar scope at select peer groupfinancial institutions, coupled with an evaluation of individualperformance, competencies and responsibilities. Salariesrepresent a foundational component of the Association’s totalcompensation program as the amounts of other components ofcompensation are determined in relation to base salary.

Short-Term IncentivesShort-term incentive payments are based on a combination ofannual Association and individual performance. The planfocuses on achieving near-term, annual results. Under the termsof the plan, the key performance result areas are loan growth,financially related services income growth and operatingefficiency. Substantially all employees in the Association areeligible to participate in this plan at various levels. Criteria usedto determine amounts payable were established by the Board ofDirectors and include the achievement of certain Associationfinancial targets and strategic business objectives. Payments

are typically made in February following the end of the year towhich the award is applicable.

Long-Term IncentivesThe Association has a long-term incentive plan and long termretention plan that provides senior officers and other specifiedkey employees the opportunity for financial rewards tied to FarmCredit East’s sustained success. Eligibility for participation islimited to those individuals who clearly have the ability to drivethe success of strategies critical to long term value creation forstockholders. The plan payouts are based on Associationperformance in the achievement of key financial metrics over athree-year performance period. Under the terms of the plan, thekey financial metrics are return on assets and operatingefficiency. The cash awards are to be paid subsequent tocompletion of the performance period cycle, subject to approvalby the Board of Directors. Participants forfeit those amounts ifthey resign prior to being paid.

Retirement BenefitsThe Association has employer-funded qualified defined benefitpension plans which are noncontributory and cover employeeshired prior to January 1, 2007. Benefits are determined by aformula based on years of service and eligible compensation.All senior officers are fully vested in the defined benefit pensionplan. The Association also has a noncontributory, unfunded,nonqualified supplemental executive retirement plan (SERP)covering the CEO only. All employees are also eligible toparticipate in a 401(k) retirement savings plan, which includes amatching contribution by the Association. Employees hired onor after January 1, 2007 receive additional, non-elective employercontributions to the 401(k) retirement savings plan. Allretirement-eligible employees, including senior officers, are alsocurrently eligible for other postretirement benefits, whichprimarily include access to health care benefits. Substantially allparticipants pay the full premiums associated with these otherhealth care benefits.

The Association also has a nonqualified deferred compensationplan that allows senior officers and other specified keyemployees to defer all or a portion of their long-term incentivecompensation. Additionally, the Association makes acontribution to this plan on behalf of participants whosebenefits under the 401(k) plan are limited due to federal tax laws.The compensation that is deferred is invested in any number ofinvestment alternatives selected by the participants. Thesealternatives are either identical or substantially similar to thoseavailable to all participants in the Association’s 401(k) plan. Theparticipant is subject to all risks and returns of amountsinvested. The election to defer is irrevocable and the deferredamounts cannot be paid except in accordance with specifiedelections as permitted by law. At that time, the participant willreceive payment of the amounts credited to his or her account

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under the plan in a manner that has been specified by theparticipant. If a participant dies before the entire amount hasbeen distributed, the undistributed portion will be paid to theparticipant’s beneficiary.

CEO CompensationThe CEO’s compensation is benchmarked to a select peer groupof financial institutions. The Board hires an independentexecutive compensation consultant to help benchmark totalcompensation. This evaluation helps ensure that suchcompensation is competitive with positions of similar scope atsimilar financial institutions. The Board’s executivecompensation committee reviews the performance of the CEOsemi-annually and reviews it with the Board. The Board ofDirectors annually approves the CEO compensation level.

In addition to the base salary, the CEO can earn both a short-termincentive and a long-term incentive each year based on pre-established performance goals. The short-term incentivepotential for 2012 ranged from 0% to 50% of base salary. During2012, the CEO received an additional short-term incentive for thesuccessful implementation of the merger plan. The 2012 long-term award was 50% of base salary. The short-term and long-term incentives shown in the Summary Compensation Tablebelow reflect the amounts earned and paid during the year. TheCEO’s compensation in excess of the Internal Revenue Code ismade up for via participation in a nonqualified deferredcompensation plan. Contributions are made at the samepercentages as available under the 401K plan. The nonqualifieddeferred compensation plan payment is shown in the SummaryCompensation Table below.

As of December 31, 2012, the CEO is employed pursuant to a fouryear employment contract which runs through December 31,2016. The employment agreement provides specifiedcompensation and related benefits in the event employment isterminated, except for termination with cause. The significantprovisions of the agreement are that the CEO would be entitled toseverance benefits of two years base salary plus any incentivesearned in the year of termination. The employment agreementmay be extended by mutual agreement of the parties.

Senior Officer CompensationThe CEO is responsible for setting the compensation levels ofthe senior officers, who, in turn are responsible for thecompensation of all other employees.

The Association’s short-term incentive compensation planfeatures annual payments based on calendar year performanceperiods. The annual short-term incentive targets are set for allemployees at the beginning of the year. For the 2012performance period, the short-term incentive levels for seniorofficers ranged from 5% to 17% of base salary. Individual

performance is also considered in the determination of theamount payable. The short-term incentives shown in theSummary Compensation Table below are paid in Februaryfollowing the end of the year to which the award is applicable.

The Association’s long-term retention plan provides seniorofficers and other specified key employees the opportunity forfinancial rewards tied to Farm Credit East’s sustained successover a three-year performance period. The three-yearperformance metrics are established at the beginning of eachthree-year period by the Board of Directors in connection withthe annual business and financial plan. For the 2012 performanceperiod, the retention plan incentive reward was 18% of basesalary. The retention incentives shown in the chart below arenot funded or held in trust but contractually obligates theAssociation to make future payments in specified amounts. Thecash awards are to be paid subsequent to completion of thethree-year performance period cycle. In February 2012, the 2009through 2011 performance period cash awards were paid tosenior officers totaling $362,393. Participants in the long-termretention plan can elect to defer incentive plan payments if theelection is made before the start of the plan year.

Summary Compensation TableCompensation earned by the CEO and aggregate compensationof the senior officers for the years ended December 31, 2012, 2011and 2010, respectively is disclosed in the accompanying table.Disclosure of the total compensation during the last fiscal year toany senior officer included in the aggregate is available tostockholders upon request in writing. Current Board policyregarding reimbursements for travel, subsistence, and otherrelated expenses provides that all employees, including seniorofficers, shall be reimbursed for actual reasonable travel andrelated expenses incurred while traveling on official Associationbusiness. Employees who use their own automobiles forAssociation business purposes will be reimbursed at a rate thathas been established in accordance with IRS guidelines. TheAssociation provides automobiles to exempt employees withcredit or Association-wide management responsibilities.Association employees are allowed to use assigned cars forpersonal use. All miles other than those driven for businesspurposes, as defined by the IRS, are considered personal milesand are accounted for as a taxable benefit to the employee. Acopy of the Association travel policy is available to stockholdersupon request.

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1 The number of senior officers in 2012 and reflected in this chart was thirteen; the numberof senior officers in 2011 and 2010 and reflected in this chart was fourteen.

2The retention incentive reflects the amount awarded to these senior officers. The amountsare held as a general obligation of the Association and are subject to forfeiture.

3Represents company contributions to a 401(k) retirement savings plan; the taxablebenefit of a company automobile for personal use, as determined by IRS regulations,and the taxable benefit of company paid group term life insurance.

4New regulatory disclosure requirement beginning in 2013 on a going forward basis.Election made to begin reporting this component in 2012.

Pension Benefits TableThe table below shows the present value of accumulated benefitspayable as of December 31, 2012 to the CEO and aggregate forthe senior officers by plan, including the number of years ofcredited service.

1The number of senior officers at December 31, 2012 and reflected in this chart was thirteen2 The Present Value of Accumulated Benefit is based on assumptions and valuation dates

that are the same as those used for the valuation of pension liabilities in the 2012annual report, see Note 10 “Employee Benefit Plans”. Retirement age is assumed to beNormal Retirement Age. The CoBank, ACB Retirement Plan pay benefits in the form ofa 5-year certain and life annuity. Optional forms of annuity payments are available onan actuarially equivalent basis. The calculations assume that a lump sum is elected byeach participant. The assumption is made that there is no probability of pre-retirementdeath or termination by any other cause. The discount rate used is 4.05% as ofDecember 31, 2012. The lump sum basis used for the valuation is 6.50% with RP-2000Combined Healthy participant mortality table.

Transactions with Senior OfficersAt December 31, 2012, there was one loan outstanding to a seniorofficer and there were loans outstanding to an immediate familymember of another senior officer. All of the loans approved werein the ordinary course of business and remain on the same terms,including interest rates, amortization schedules, and collateral asthose prevailing at the time for comparable transactions withother persons and did not involve more than the normal risk ofcollectibility. Information regarding related party transactions isincorporated herein by reference from Note 11 of theconsolidated financial statements included in this annual reportto stockholders.

Code of EthicsThe Association sets high standards for honesty, ethics,integrity, impartiality and conduct. Each year, every employeecertifies compliance with the Association’s Employee Standard ofConduct Policy which establishes the ethical standards of theAssociation. Additionally, all employees certify compliance withthe Code of Ethics. The Code of Ethics supplements theEmployee Standard of Conduct Policy and establishes additionalresponsibilities related to the preparation and distribution of theAssociation’s financial statements and related disclosures. Fordetails about the Association’s Code of Ethics, visitFarmcrediteast.com and click on About Us. A copy of theAssociation’s Code of Ethics is available to stockholders uponrequest.

Pension Benefits Table - 2012

Number of Years

of Credited Service

Actuarial Present Value of

Accumulated Benefits2

Payments During

Last Fiscal Year

William J. Lipinski, CEO CoBank , ACB Retirement Plan 32.17 $ 1,915,894 $ 0 Supplemental Executive Retirement Plan 32.17 1,960,057 $ 0 Total $ 3,875,951 $ 0 Senior Officers (excluding CEO)1 CoBank , ACB Retirement Plan 30.00 $ 11,381,576 $ 0 Total $ 11,381,576 $ 0

Summary Compensation Table 2012 2011 2010 William J. Lipinski, CEO Salary $ 535,000 $ 520,000 $ 500,000 Short-term Incentive 300,040 197,000 225,000 Long-term Incentive 260,000 250,000 247,000 Change in Pension Value4 600,608 not disclosed not disclosed Deferred 23,702 21,420 23,040 Perquisites/Other3 35,583 30,120 27,837

Total $ 1,754,933 $ 1,018,540 $ 1,022,877 Senior Officers (excluding CEO)1 Salary $ 2,345,540 $ 2,551,338 $ 2,351,246 Short-term Incentive 316,400 319,500 325,093 Retention Incentive2 382,157 399,638 382,080 Change in Pension Value4 1,474,631 not disclosed not disclosed Perquisites/Other3 199,176 216,023 211,471

Total $ 4,717,904 $ 3,486,499 $ 3,269,890

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Disclosure Information Required by Regulations

In accordance with Farm Credit Administration regulations, FarmCredit East, ACA (the Association) has prepared this AnnualReport to Stockholders for the year ended December 31, 2012 inaccordance with all applicable statutory or regulatoryrequirements.

Description of BusinessGeneral information regarding the business is incorporatedherein by reference to Note 1 of the financial statements includedin this annual report to stockholders.

The description of significant developments, if any, required tobe disclosed in this section is incorporated herein by reference to“Management’s Discussion and Analysis of Financial Positionand Results of Operations” included in this annual report tostockholders.

Description of PropertyFarm Credit East, ACA is headquartered in Enfield, CT. A listingof Association offices owned and/or occupied are on the insideback cover of this annual report. The Cobleskill, NY andCortland, NY offices are leased. All other properties listed areowned by Farm Credit East.

Legal Proceedings and Enforcement ActionsInformation regarding legal proceedings is incorporated hereinby reference to Note 12 of the consolidated financial statementsincluded in this annual report to stockholders. The Associationwas not subject to any enforcement actions at December 31,2012.

Description of Capital StructureInformation required to be disclosed in this section isincorporated herein by reference to Note 7 of the consolidatedfinancial statements included in this annual report tostockholders.

Description of LiabilitiesInformation required to be disclosed in this section isincorporated herein by reference to Notes 6, 9, 10, 12, 13 and 15of the consolidated financial statements included in this annualreport to stockholders.

Selected Financial Data“Five Year Summary of Selected Financial Data” included in thisannual report to stockholders, is incorporated herein byreference.

Management’s Discussion and Analysis“Management’s Discussion and Analysis” included in thisannual report to stockholders, is incorporated herein byreference.

Financial StatementsThe “Report of Management”, “Report of Audit Committee”,“Management’s Report on Internal Control over FinancialReporting”, “Report of Independent Auditors”, “ConsolidatedFinancial Statements”, and “Notes to Consolidated FinancialStatements” included in this annual report to stockholders, isincorporated herein by reference.

Directors and Senior Officers“Director Disclosures” and “Senior Officer Disclosures” includedin this annual report to stockholders, is incorporated herein byreference.

Relationship with Independent AuditorsThere were no changes in independent auditors since the priorannual report to stock holders and there has been no materialdisagreement with our independent auditors on any matter ofaccounting principles or financial statement disclosure duringthis period.

Credit and Services to Young, Beginning and SmallFarmers and Ranchers“Young, Beginning and Small (YBS) Farmers and RanchersProgram” included in this annual report to stockholders, isincorporated herein by reference.

Involvement in Certain Legal ProceedingsThere were no matters that came to the attention of the Board ofDirectors or management regarding involvement of currentdirectors or senior officers in specified legal proceedings thatrequire to be disclosed.

CoBank, ACB Annual Report and Quarterly ReportsAs an Association Stockholder, your equity investment in theAssociation is materially affected by the financial condition andresults of operations of the CoBank, ACB (CoBank).

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Regulations require that CoBank’s Annual and Quarterly Reportsbe made available to you upon request at no charge.Accordingly, you may pick-up a copy of CoBank’s Annual andQuarterly Reports at one of our offices, or you may call the officeto have a copy sent to you. A listing of the Association officesand telephone numbers are listed on the inside back cover of thisAnnual Report.

Customer PrivacyCustomer financial privacy and the security of your other non-public information are important to us. Farm Credit East holdsyour financial and other non-public information in strictestconfidence. Federal regulations allow disclosure of suchinformation by us only in certain situations. Examples of thesesituations include law enforcement or legal proceedings or whensuch information is requested by a Farm Credit System institutionwith which you do business. In addition, as required by Federallaws targeting terrorism funding and money laundering activities,we collect information and take actions necessary to verify youridentity.

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Young, Beginning and Small (YBS) Farmers andRanchers ProgramOverviewFarm Credit East, ACA (the Association) takes great pride thatit’s founding Board of Directors (Board) made young, beginningand small farmers a special focus since its founding in 1994. TheBoard maintains a standing committee of directors to overseeyoung, beginning and small farmer service and initiatives, as wellas to plan further to serve these groups.

MissionThe Association’s Board recognizes that the long range strengthand soundness of the future of Farm Credit East and of theagricultural community in the area it serves depends on theindividuals entering the industry. It further recognizes thatdemands for capital and farm and financial management skillsmake it exceedingly difficult to become established in thebusiness. Therefore, we believe that it is in the Association’sbest interest to assist young, beginning and small farmers byproviding loans and credit related services, and help to provideand encourage their participation in activities that improve farmand financial management skills.

Program DefinitionsThe definitions of young, beginning, and small farmers andranchers as developed by the Farm Credit Administration follow:

• Young - A farmer, rancher, producer or harvester of aquaticproducts who is 35 years or younger as of the loantransaction date.

• Beginning - A farmer, rancher, producer or harvester ofaquatic products who has 10 years or less farmingexperience as of the loan transaction date.

• Small Farmer: A farmer, rancher, producer or harvester ofaquatic products who normally generates less than $250,000in annual gross sales of agricultural or aquatic products.

ObjectivesYoung, beginning and small farmers are a vital part of agricultureand Farm Credit East is proud to provide innovative productsand services that contribute to their success. In 1995, the Boardcreated a committee to develop and then oversee a program toassist young, beginning and small farmers, regarding this as oneof the core values of the Farm Credit East association.

Services ProvidedThere are several credit and other related services offeredthrough the Board approved YBS Program that allows FarmCredit East to effectively serve the needs within the young,beginning and small customer segments:

• Special incentives that may be offered at a discount for aperiod of up to five years include:o Farm accounting and management software feeso Tax preparation feeso Consulting feeso Appraisal feeso FSA guaranteed loan feeso Interest rate assistance

Farm Credit East’s special incentives were $226,038, $221,240 and$201,964 for the years ended December 31, 2012, 2011, and 2010respectively.

• Since 2006, incentives are offered to organizations, schools,and universities for special training and educationalprograms utilizing the Farm Credit East developedHarvesting a Profit guide.

• Farm Credit East provides support, funding, and staffinvolvement in Dairy Fellows, Farm Credit Fellows, AgAmbassadors, North East Dairy Challenge, and otherprograms at educational institutions.

• Representation by YBS farmers on Farm Credit East’sCustomer Service Councils. These councils providecustomer feedback and function as a liaison to associationmanagement.

• A portion of the young, beginning and small loan portfolio issupported by government guarantees, including guaranteesby the Farm Services Agency (FSA) and USDA’s Businessand Industry guaranteed loan program. Provided below arestatistics related to government guarantees usage among theyoung, beginning and small portfolio.

Government Guaranteed Young, Beginning and Small Farmer Loans

Number Volume *

Young 378 $ 66,974 Beginning 413 $ 78,578 Small 420 $ 50,265

New Government Guaranteed YBS Loans (Originated in 2012)

Number Volume * Young 54 $ 8,301 Beginning 70 $ 12,111 Small 54 $ 6,675

* in thousands

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DemographicsThe local service area of Farm Credit East, ACA includes thestates of New Jersey, Rhode Island, Connecticut, Massachusetts,and parts of the states of New York and New Hampshire.Demographic data for Young, Beginning, and Small farmers wastaken from the USDA’s 2007 Census of Agriculture. The censusis conducted every five years. It showed the following:

Percentage Levels in Farm Credit East Lending Territory

Expressed as a % of Total Farms Young Beginning Small

10.6% 35.5% 92.1%

Farm Credit East has annually undertaken a study of the young,beginning, small farmer segment. This study makes adetermination of Association penetration of young, beginningand small farmers utilizing information reported in the 2007Census of Agriculture to better ascertain Farm Credit East’spenetration of these farmer segments. The following table showsFarm Credit East’s penetration in each market segment:

Penetration Levels in Farm Credit East Lending Territory December 31, 2012

Young Beginning Small 18% 25% 39%

Farm Credit East penetration is determined based on the number of loans to a specified group as a percentage of total loans.

Young, Beginning and Small Farmer Volume in FarmCredit East’s Loan PortfolioThe following table outlines the percentage of young andbeginning farmer and rancher loans in the loan portfolio (bynumber and volume) as of December 31, 2012 compared to totalnumber of loans in the portfolio:

The following table provides a breakdown of small farmer andrancher loans by size as of year-end 2012:

Category Number of Loans

% of Total Loans

Volume Outstanding *

% of Total

Volume

Total Loans and Commitments 16,972 100% $ 6,239,579 100%

Young Farmers and Ranchers 3,103 18% $ 710,157 11%

Beginning Farmers and Ranchers 4,345 26% $ 953,023 15%

Goals and ResultsAs part of Farm Credit East’s planning process, annualquantitative and qualitative goals are established.

The table below outlines the Association quantifiable goalsunder YBS loan commitments for 2012 and compares actualresults to those goals:

Number / Volume Outstanding $0 - $50,000

$50,000 - $100,000

$100,000 - $250,000 >$250,000

Total # of Loans and Commitments 4,999 3,301 4,326 4,346

Total # of Loans to Small Farmers / Ranchers 2,504 1,681 1,693 807

# of Small Loans as a % of Total # of Loans 50% 51% 39% 19%

Total Loans and Commitments Outstanding $ 125,532 $ 255,932 $ 716,210 $ 5,141,905

Total Volume and Commitments to Small Farmers / Ranchers * $ 66,027 $ 128,338 $ 269,170 $ 426,100

Loan Volume to Small Farmers / Ranchers as a % of Total Loan Volume 53% 50% 38% 8%

* in thousands

The numbers listed above do not include any investments madeunder FarmStart, LLP.

Farm Credit East has established the following quantifiable andquantitative goals under YBS loan commitments for 2013:

Young Beginning Small 12/31/2012 ACTUAL 3,077 4,298 6,628 12/31/2013 GOAL 3,000 4,200 6,600 12/31/2014 3,100 4,300 6,050 12/31/2015 3,220 4,400 6,100 12/31/2016 3,300 4,500 6,150 12/31/2017 3,400 4,600 6,200

Young Beginning Small 12/31/2011 ACTUAL 3,107 4,274 6,729 12/31/2012 GOAL 3,150 4,350 6,600 12/31/2012 ACTUAL 3,077 4,298 6,628 2012 as a % of GOAL 98% 99% 101%

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Farm Credit East YBS 2013 qualitative goals address credit,collaboration, financial services and educational assistance, toinclude:

• Incentive programs including interest rateincentives, payment of FSA guarantee fees, and feereductions on certain financial services (recordkeeping, taxes, appraisal and consulting) in order tofacilitate the entry of new farmers and to make FarmCredit their lender of choice

• Scholarships for students pursuing a career inagriculture

• Working with organizations, schools and universitiesdelivering special training and educational programsfor students

• Adult education program supporting agriculturalleadership and excellence

• Local grass roots involvement by branch staff inorganizations and groups such as FFA, etc.

• Advertisements geared to YBS and using publicationssuch as the Small Farm Quarterly

• Continued support and collaboration with stateFarmLink and FarmNet programs

• Continued representation by YBS farmers onAssociation Customer Service Councils

• Support, funding, and staff involvement in DairyFellows, Farm Credit Fellows, Ag Ambassadors, andother programs at educational institutions

• AgEnhancement grants to foster agriculture’s youth,leadership and viability

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Customer Service CouncilsThe Farm Credit East Board of Directors has established a system of Customer Service Councils (CSC) for each of the 19 branchoffices. These are composed of a cross section of stockholders and other members of the agricultural community who meet threetimes annually with their local Branch Office Manager to provide feedback and input on a variety of topics. This is in keeping withFarm Credit East’s strategic vision of retaining a strong grass roots network and having strong, highly empowered branch offices.

The track record of the CSCs has been very positive as Farm Credit East Branch Office Managers have received invaluable feedbackon a wide variety of topics. The Board and Management sincerely appreciate the contribution of the CSC members listed below andlook forward to building on this Farm Credit East tradition in 2013.

Batavia, NYMaryjo Bedford, Bedford’s Greenhouse, Inc., Akron, NYTom Corcoran, HR and W Harvesting, P/S, Caledonia, NYRod Farrow, Lamont Fruit Farms, Waterport, NYTom Jeffres, R.L. Jeffres & Sons, Inc., Wyoming, NYBrett Kreher, Kreher’s Poultry Farm, Clarence, NYMatthew Lamb, Lamb Farms, Inc., Oakfield, NYJeffrey Mulligan, Mulligan Farm, LLC, Avon, NYJohn Reynolds, Reyncrest Farms Inc., Corfu, NYPatty Riner, MY T Acres, Inc., Batavia, NYJason Schwab, Schwab Dairy Farm, Delvan, NYJason Swede, Swede Farms, LLC, Piffard, NYWendy Wilson, Lynoken Farms, Inc., Lyndonville, NYPatrick Woodworth, Sandy Knoll Farms, Inc., Medina, NY

Bedford, NHNick Brunet, Green Crow Corporation, Auburn, NHJoseph E. Golter, Golter Lobster Fisheries, LLC, Greenland, NHRobert A. Johnson, II, Pittsfield, NHLisa Mason, Punch Brook Farm/Barn Store of New England, Franklin, NHPeter Mullen, Irish Venture, Inc., Gloucester, MAEllen Parlee, Parlee Farms, Tyngsborough, MAJamie Robertson, Bohanan Farm, Contoocook, NHVitor Silva, Sons of the Wind, Merrimac, MACharles Souther, Apple Hill Farm, Concord, NH

Bridgeton, NJMichael Brooks, Dusty Lane Farm, LLC, Elmer, NJDavid K. Johnson, D. Johnson Farms, Inc., Bridgeton, NJEdward Overdevest, Overdevest Nurseries, Inc., Bridgeton, NJMark Panco, C&M Flower Growers, Vineland, NJWayne Reichle, Lunds Fisheries, Inc., Cape May, NJLouis Sepers, Sepers Nursery, LLC, Newfield, NJThomas Sheppard, Sheppard Farms, Inc., Cedarville, NJDonald C. Strang, Farm Rite, Inc., Elmer, NJFrank Tedesco, Safeway Freezer Store Company, LLC, Vineland, NJ

Burrville, NYEric Behling, Behling Orchards, LLC, Mexico, NYJonathan Beller, Beller Farms, LLC, Carthage, NYKristina Burger, Deer Run Dairy, Adams, NYLynn Murray, Murcrest Farms, Watertown, NYRonald Robbins, North Harbor Dairy LLC, Sackets Harbor, NYDavid Rudd, Lacona, NYDavid Fralick, The Cape Winery, Cape Vincent, NYLyle Wood, Wood Farms, LLC, Clayton, NY

Claverack, NYPeter Barton, Lime Ridge Farms/Barton Orchards, Poughquag, NYDavid W. Becker, Becker’s Farm, Rensselaer, NYJonathan Chiaro, Yonder Fruit Distributors, Hudson, NYRobert Graves, Faddegon’s Nursery, Inc., Latham, NYChristine Jones, Sunrise Farm, Inc., Catskill, NYMichael Lischin, Dutchess View Farm, Pine Plains, NYPhil Trowbridge, Trowbridge Farms, Ghent, NYLloyd Vaill, Jr., Lo-Nan Farm, LLC, Pine Plains, NYRobert F. Verstandig, Verstandig’s Florist, Selkirk, NY

Cobleskill, NYJohn Balbian, Grober Nutrition, Amsterdam, NYRichard Ball, Schoharie Valley Farms, Schoharie, NYRaymond J. Dykeman, Dykeman Farms, Fultonville, NYLuke Johnson, Joleanna Holsteins, Unadilla, NYRussell J. Kelly, Jr., Glenvue Farm, Fultonville, NYBrent Leonard, Carefree Gardens, Cooperstown, NYM. Victoria McCaffrey, Oxkill Farm, Schoharie, NYMichael D. Phelan, Boulder Brook Farm, Warnerville, NYEdward Slicer, Diversified Ag, Jefferson, NY

Cortland, NYDennis Birdsall, Homer, NYWalt Blackler, Apple Acres, LaFayette, NYCarl Dennis, Manlius, NYPaul Fouts, Fouts Farm, Cortland, NYJohn Gates, Seneca Valley Farms, Burdett, NYLee Hudson, Hudson Egg Farms, Camillus, NYJames Loomis, Fabius, NYEdie McMahon, McMahon’s E-Z Acres, Homer, NYGeorge Schaefer, Schaefer’s Gardens, Chenango Forks, NYJudith Whittaker, Whittaker Farms, Whitney Point, NY

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Greenwich, NYJames Chambers, Chambers Valley Farms, Inc., Salem, NYNathan Darrow, Saratoga Apple, Schuylerville, NYCharles Hanehan, Hanehan Family Dairy, LLC, Saratoga Springs, NYDavid D. Horn, DVM, Greenwich, NYJan King, King Ransom Farms, LLC, Schuylerville, NYAnne McMahon, McMahon Thoroughbreds, Saratoga Springs, NYIan C. Murray, Brookside Farms, Inc., Ballston Spa, NYJennifer Thomas, Thomas Poultry Farm of Schuylerville, Inc., Schuylerville, NY

Hornell, NYJeff Baker, Val Dale Farms Partnership, Friendship, NYChuck Deichmann, Belmont, NYBryan Dickson, Dickson Trucking LLC, Savona, NYRod Karr, Karr Dairy Farms, LLC, Hornell, NYEd Merry, Lismore Dairy, LLC, Arkport, NYJohn Schumacher, Schum-Acres & Associates, Inc., Naples, NYGreg Squires, J&G Squires, Prattsburg, NYJoe Trappler, JT Logging, Addison, NYPhil Weaver, Bluegill Farms Partnership/J.P. Swine Enterprises, LLC, Bath, NY

Mayville, NYEd Barger, Donald E. Barger, Jr., Westfield, NYEric Dunnewold, Dunnewold Farms, LLC, Clymer, NYChad Fredd, Grape View Dairy, LLC, Westfield, NYRich Hill, Hill Valley Farm, LLC, Cattaraugus, NYKris Ivett, Halocrest Farms P/S, South Dayton, NYTed LeBaron, M&L Trucking, LLC, Sinclariville, NYCraig McCray, McCray Farms, Clymer, NYJamie Militello, Militello Farms, LLC, Forestville, NYDennis/Sue Rak, Double A Vineyards, Inc., Fredonia, NYJody Waterman, Kevin and Jody Waterman, Forestville, NY

Middleboro, MADawn M. Allen, Freetown Farm, LLC, Freetown, MAJohn W. Bartlett, Bartlett’s Ocean View Farm, Inc., Nantucket, MAE. Daniel Eilertsen, Nordic, Inc., Fairhaven, MAKevin McLaughlin, Fairhaven Shipyard Companies, Inc., Fairhaven, MAMatthew Piscitelli, Olson Greenhouses, Raynham, MAWilliam B. Stearns IV, Southers Marsh Golf Club, LLC, Plymouth, MA

Dayville, CTJohn Bennett, John Bennett Stables, Putnam, CTAllyn Brown, III, Maple Lane Farms, Preston, CTRobin Chesmer, Graywall Farms, Lebanon, CTJan Eckhart, Sweet Berry Farm, Middletown, RISharon Hewes, Holdridge Farm Nursery, Ledyard, CTSamuel Hull, N.E. Timberland Investments, Union, CTJames Koebke, Walnut Lane Farm, Dudley, MAGeir Monsen, Seafreeze Limited, North Kingstown, RIJohn Nunes, Jr., Newport Vineyards, Middletown, RIPerry Raso, Matunuck Oyster Farm, Peacedale, RILinda Rich, We-Li-Kit Farm, Pomfret, CTClark Woodmansee, Woodmansee Farm, Preston, CT

Enfield, CTJohn Casertano, N.Casertano Greenhouses and Farms, Inc., Cheshire, CTAlbert “Chip” Hager, Jr., Hager Brothers Dairy and Hagers Farm Market, Colrain, MAAlexander Gondek, Jr., AJ Gondek Farms, LLC, Portland, CTMarc Laviana, Sunny Border Nurseries, Inc., Kensington, CTRonald “Skip” LeClerc, LeClerc & Sons Logging, Belchertown, MAKurt Lindeland, Connecticut Mulch Distributors, Inc., Enfield, CTPeter Melnik, Bar Way Farms, Old Deerfield, MACharles Newman, Planters’ Choice, LLC, Newtown, CTDarryl Newman, Planters’ Choice, LLC, Newtown, CTDon Patterson, Patterson Farm, Sunderland, MAKaren Randall, Randall’s Farm, Inc., Ludlow, MABill Van Wilgen, Van Wilgen’s Garden Center, North Branford, CT

Flemington, NJLisa Applegate, Battleview Orchards, Freehold, NJLawrence Ashley, Ashley Farms, Flanders, NJStephen Barlow III, Barlow Flower Farm, Sea Girt, NJSteve Gambino, Villa Milagro Vineyards, Finesville, NJWalter Hughes, United Seacoast Corp., Atlantic Highlands, NJSteven R. Jany, Rustin Farms, West Windsor, NJRichard D. Klevze, Ringoes, NJMichael Puglisi, Puglisi Egg Farms, Howell, NJ

Geneva, NYDoug DeBadts, Sr., Jay R. DeBadts & Sons Fruit Farm, Sodus, NYJohn Fowler, Fowler Brothers, Inc., North Rose, NYJackie Fox, Fox Fruit Farms, LLC, Williamson, NYDawn Hansen, Hansen Farms, LLC, Stanley, NYMarcia Hatfield, Hatfield Farms, LLC, Scipio Center, NYJohn Karszes, Heifer Haven Farms, Stanley, NYJames Kennedy, Willow Pond Aqua Farms, Inc., Canandaigua, NYJohn Knopf, FA-BA Farms, LLC, Canandaigua, NYGary Lilyea, Lilyea Farms, Penn Yan, NYDale Mattoon, Pine Hollow Farms, LLC, Locke, NYJulie Pellett, Linholm Dairy LLC, Bloomfield, NYMark Wagner, Lamoreaux Landing Wine Cellars, Lodi, NY

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Middletown, NYWisner Buckbee, Jr., Warwick, NYPaul Burke, Russell Orchards, Wyckoff, NJRichard Byma, Sussex, NJSteven Clarke, Prospect Hill Orchard, Inc., Milton, NYRoderick O. Dressel, New Paltz, NYPeter J. Ferrante, New Paltz, NYEileen Frangione, Westtown, NYCharles Lain, Jr., Pine Island Turf Nursery, Inc., Pine Island, NYJohn Lupinski, Goshen, NYAnthony Moriello, Moriello Brothers, New Paltz, NYNeal Needleman, Westtown, NY

Potsdam, NYDaniel Chambers, Chambers Farms, LLC, Heuvelton, NYHarry Fefee, Brushton, NYAllan Friend, Burke, NYBlake Gendebien, Twin Mill Farms, LLC, Ogdensburg, NYAllen Kelly, Rensselaer Falls, NYLouAnne King, Mapleview Farms, Madrid, NYSteven Morrill, Gebarten Acres, Dekalb Junction, NYKeith Pierce, Royal J Acres, Ogdensburg, NY

Riverhead, NYLouis Caracciolo, Jr., Shade Tree Nursery, Jamesport, NYJohn Halsey, Milk Pail, LLC, Water Mill, NYAdam Halsey, Water Mill, NYEve Kaplan-Walbrecht, Garden of Eve, Riverhead, NYNorman Keil, N & O Horticultural Products, Inc., St. James, NYJeffrey Mayer, Mayflo, Inc., Patchogue, NYJanice McClellan, DeLalio Sod Farm, Inc., Dix Hills, NYRobert W. Nolan, Deer Run Farms, LLC, Patchogue, NYLyle Wells, Wells Homestead Acres, Riverhead, NY

Sangerfield, NYJohannes Barendse, River Road Farm & Greenhouses, Utica, NYPatricia Bikowsky, Madison, NYRob Collins, Collins Knoll Farm, Sauquoit, NYDavid Curtin, Curtin Dairy, LP, Cassville, NYJames Frazee, Cazenovia Equipment Company, Cazenovia, NYJoseph Guzik, Beeline Farms, Richfield Springs, NYAmy Kelsey, Monanfran Farms, Inc., Canastota, NYJohn Marshman, Tiger Lily Farms, Oxford, NYJack Russin, Fern Hill Farm, Madison, NYMark Trnchik, Jr., Taberg, NY

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Management

William J. Lipinski .................................................................................................... Chief Executive OfficerCharles S. Herring .............................................................................. President and Chief Operating OfficerWilliam S. Bathel ................................................................. Executive Vice President and Chief Risk OfficerDavid W. Boone ................................................................ Executive Vice President and Regional ManagerGary R. Bradley ................................................................. Executive Vice President and Regional ManagerJohn P. Caltabiano ............................................................ Executive Vice President and Regional ManagerBrian K. Monckton ............................................................ Executive Vice President and Regional ManagerRoger E. Murray ..................................................... Executive Vice President and Business Unit SupervisorJames N. Putnam II ..................................................... Executive Vice President for Marketing and PlanningPaul S. Bajgier ......................................................................................Senior Vice President and TreasurerJames D. Miller ......................................................................................... Senior Vice President of FinanceMichael J. O’Connor, III ............................. Senior Vice President, General Counsel and Corporate SecretaryRobert H. Reid, Jr. ...................................................... Senior Vice President and Human Resources DirectorRobert A. Smith ........................................... Senior Vice President, Public Affairs and Knowledge Exchange

Board of Directors

Andrew J. Gilbert ........................................................................................................................ ChairmanMatthew W. Beaton ............................................................................................................. Vice ChairmanHenry Adams, III .......................................................................................................................... DirectorRobert R. Brown, II .................................................... ............................................................................. DirectorSamuel G. Conard ............................................................................................................................DirectorChristine E. Fesko...........................................................................................................................DirectorBenjamin J. Freund ....................................................................................................................... DirectorLaurie K. Griffen .............................................................................................................................DirectorJune W. Hoeflich .............................................................................................................. Outside DirectorAnn P. Hudson ..................................................................................................................Outside DirectorHenry L. Huntington .................................................................................................................... DirectorRichard P. Janiga .......................................................................................................................... DirectorPeggy Jo Jones .................................................................................................................Outside DirectorAbbott W. Lee ............................................................................................................................. DirectorDouglas W. Shelmidine ...................................................................................................................Director

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