farm credit west 2012 annual report

2012 Annual Report

Farm Credit West

Table of Contents

Five-Year Summary of Selected Financial Data ....................................................................................... 1

Letter to Our Shareholders .................................................................................................................... 2-3

Management’s Discussion and Analysis ............................................................................................. 4-20

Report of Management ........................................................................................................................... 21

Report of the Audit Committee ............................................................................................................... 22

Report of Independent Auditors .............................................................................................................. 23

Consolidated Balance Sheet .................................................................................................................... 24

Consolidated Statement of Comprehensive Income ............................................................................... 25

Consolidated Statement of Changes in Members’ Equity ...................................................................... 26

Consolidated Statement of Cash Flows ............................................................................................ 27-28

Notes to Consolidated Financial Statements ..................................................................................... 29-50

Disclosure Information Required by Farm Credit Administration Regulations ..................................................................................... 51-56

Farm Credit West Office Locations ................................................................................ inside back cover

Front Cover: Boeger Winery, Placerville, California Photo: Kelly McManus Photography

Farm Credit West, ACA

Five-Year Summary of Selected Financial Data

(dollars in thousands) 2012 2011 2010 2009 2008

At December 31:Consolidated Balance Sheet Data Loans and leases 6,078,186$ 5,655,766$ 5,484,059$ 5,347,217$ 4,962,362$ Less: allowance for loan losses (33,200) (29,600) (24,200) (21,000) (9,175) Net loans and leases 6,044,986 5,626,166 5,459,859 5,326,217 4,953,187 Investment securities 230,926 271,556 315,118 364,433 419,576 Investment in CoBank/AgBank 208,005 205,888 169,936 168,089 137,378 Other property owned 28,974 64,140 82,827 48,777 105 Other assets 155,622 114,910 102,227 120,471 111,219 Total assets 6,668,513$ 6,282,660$ 6,129,967$ 6,027,987$ 5,621,465$

Obligations with maturities of one year or less 5,453,720$ 5,162,583$ 5,166,299$ 5,179,169$ 4,849,143$ Obligations with maturities longer than one year 6,091 5,658 6,433 6,057 7,304 Total liabilities 5,459,811 5,168,241 5,172,732 5,185,226 4,856,447

Preferred stock 198,336 198,336 180,509 134,660 109,995 Capital stock and participation certificates 3,847 3,816 3,868 3,876 3,813 Unallocated retained earnings 1,002,456 905,955 766,850 697,429 639,558 Accumulated other comprehensive income 4,063 6,312 6,008 6,796 11,652 Total members’ equity 1,208,702 1,114,419 957,235 842,761 765,018 Total liabilities and members’ equity 6,668,513$ 6,282,660$ 6,129,967$ 6,027,987$ 5,621,465$

For the year ended December 31:Consolidated Statement of Income Data Net interest income 166,274$ 160,349$ 146,555$ 137,397$ 111,107$ Provision for loan losses (16,046) (22,975) (23,049) (21,945) (2,481) Noninterest income (expense), net 1,378 38,797 (17,769) (24,083) (21,019) (Provision for) benefit from income taxes (134) 678 81 819 5,595 Net income 151,472$ 176,849$ 105,818$ 92,188$ 93,202$

Comprehensive income 149,223$ 177,153$ 105,030$ 87,332$ 99,951$

Consolidated Key Financial RatiosFor the year ended December 31: Return on average assets 2.40% 2.92% 1.75% 1.58% 1.83% Return on average members’ equity 12.71% 16.80% 11.23% 11.09% 12.52% Net interest income as a % of average earning assets 2.78% 2.80% 2.56% 2.46% 2.29% Net charge-offs as a % of average loans 0.22% 0.32% 0.37% 0.20% 0.06%At December 31: Members’ equity as a % of total assets 18.13% 17.74% 15.62% 13.98% 13.61% Ratio of debt to members’ equity 4.5 to 1 4.6 to 1 5.4 to 1 6.2 to 1 6.3 to 1 Allowance for loan losses as a % of loans 0.55% 0.52% 0.44% 0.39% 0.18% Permanent capital ratio 16.99% 16.12% 14.27% 12.53% 12.67% Total surplus ratio 13.70% 12.62% 11.02% 10.05% 10.54% Core surplus ratio 13.56% 12.47% 10.98% 10.05% 10.54%

Other Patronage distribution declared 51,000$ 33,000$ 32,000$ 31,000$ 28,000$ Preferred stock dividends declared and paid 3,971$ 4,744$ 4,397$ 3,317$ 3,597$ Loans serviced for others 1,267,858$ 1,264,329$ 1,217,260$ 1,232,391$ 1,227,218$

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Letter to Our Shareholders

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We are proud to present this 2012 Annual Report to Shareholders (Annual Report) for Farm Credit West. While the financial information found in this report thoroughly documents another successful year, we want to take the opportunity in this letter to communicate to you some important information that complements the financial commentary within.

Let’s start with a very brief summary of financial performance and condition.

Net income was $151 million in 2012, of which $145 million was from core operations. This compares with $177 million the year before, of which $129 million was from core operations with an additional $48 million resulting from non-recurring transactions related to the merger of our funding bank.

Average earning assets grew $254 million or 4.4% in 2012. This is the highest level of growth we have seen since 2009.

Asset quality trend is improving, with 94.7% nonadversely classified loans at year-end 2012 compared with 94.1% at the end of 2011.

Customer utilization of our programs for investment and excess funds continues to grow. Combined future payment funds and preferred stock balances rose to $530 million at year-end 2012 compared with $455 million at the end of 2011.

Our primary regulatory capital measure is the core surplus ratio. This ratio started the year at 12.5% and rose to 13.6% by the end of 2012, reflecting growing capital strength.

Positive results in all of these key measures led to your Board’s decision to declare a cash patronage distribution at 0.75% of average customer borrowing. That equated to $51 million in cash returned to our customers in February 2013, a tangible example of the added value guided by our value-driven philosophy. This was a big step in FCW’s evolution. For the seven years prior to 2012, FCW had distributed cash patronage at a rate of 0.50%. The decision to increase cash distributions by 50% was one requiring careful consideration because the Board recognizes that increasing patronage heightens future expectations, so the ability to sustain patronage at the 0.75% level in the future weighed heavily. Some of the key factors that led to the decision included continued expectations for strong core earnings and a significantly improved capital position able to capitalize reasonable levels of loan growth. While each year is a new decision to distribute cash patronage, we believe FCW is positioned to continue at the new level for the foreseeable future.

Patronage is just one of the many unique features of our cooperative structure. Another is our system of governance, where each year our voting customer-owners have a say in selecting a governing board made up of local farmers and ranchers. Who better to guide your cooperative in its mission to serve agriculture? Your Board recognizes the responsibility that comes with their position. Foremost is recognition that FCW must be financially sound to weather the ups and downs of agriculture. Accordingly, decisions are made with a long-term perspective to ensure that FCW continues to provide value for future generations of farmers and ranchers like it has the last 95 years.

The power of the cooperative model is also demonstrated by the collective strength of the Farm Credit System (System). On a combined basis, the System posted 2012 net income of $4.1 billion and ended the year with $247 billion in total assets, both records for the System. And when many financial institutions were near collapse during the recent 2008-2009 financial crisis, the System continued to report record or near-record earnings and asset growth year after year. Consequently, the System has been rewarded for its financial strength and conservative governance by strong support in the financial markets and thus ready access to low-cost capital to fund our customers’ borrowing needs.

Letter to Our Shareholders

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Our funding bank is an integral part of the System and plays a key role in providing us competitively sourced funding for our portfolio. On January 1, 2012, our funding bank, U.S. AgBank, merged with CoBank, with CoBank becoming the successor bank. FCW has long had a strategic relationship with CoBank because we were well aligned in management philosophy, so we were a strong proponent of the merger. The first year went smoothly from our perspective. There are future changes in the works to merge the operations of the two banks, but we feel most of those changes will have a positive impact on our own operations.

Our commitment to you is to provide superior service at competitive rates in a timely, professional, and ethical manner. We utilize our annual customer satisfaction survey to assess how we are doing in meeting that commitment. In 2012, we mailed 2,004 surveys and 929 were returned for a 46% response rate. The overall service rating from respondents was favorable, exceeding the target we established in our 2012 business plan. Once again, 99% of respondents indicated they would recommend Farm Credit West – a tremendous accomplishment for your customer-owned cooperative.

Surveys are not the only way we seek feedback from our customer-owners. We are entering our fourth year of our Local Advisor Committee (LAC) program. Each of our three regions has ten customer representatives on the LAC. We meet three times each year in each region to share information about FCW performance and direction. More importantly, we listen to them as customers. The only way we get better is by listening to what you want. You don’t have to be on the LAC to provide feedback. Please join us at the customer appreciation event planned in your area. You’ll get to meet members of the FCW management team, who would love to hear what you have to say about Farm Credit West.

Please know that we greatly appreciate your business. We look forward to the opportunity to thank you in person at the upcoming customer appreciation event in your area.

Sincerely,

Edgar A. Terry Chairman of the Board of Directors

Mark D. Littlefield President and Chief Executive Officer

March 7, 2013

Management’s Discussion and Analysis

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Introduction The following discussion summarizes the financial position and results of operations of Farm Credit West, ACA and its subsidiaries Farm Credit West, FLCA and Farm Credit West, PCA (collectively, Farm Credit West) for the year ended December 31, 2012. Comparisons to prior years are included. We have emphasized material known trends, commitments, events, or uncertainties that are reasonably likely to impact our financial condition and results of operations. You should read these comments along with the financial statements, footnotes, and other sections of this report. The accompanying financial statements were prepared under the oversight of our Audit Committee.

Our annual and quarterly reports to shareholders are available on our website, www.farmcreditwest.com, or can be obtained free of charge by calling our corporate headquarters at 916-780-1166, or by writing to Farm Credit West, 1478 Stone Point Drive, Suite 450, Roseville, CA 95661. Annual reports are mailed to all stockholders within 90 days after year-end and are available on our website within 75 days after year-end; quarterly reports are available on our website within 40 days after each calendar quarter-end. The 2013 quarterly reports to shareholders will be available on approximately May 10, 2013, August 9, 2013, and November 8, 2013.

Business Overview

Farm Credit System Structure and Mission

We are one of 82 associations in the Farm Credit System (System), which was created by Congress in 1916 and has served agricultural producers for more than 95 years. The System’s mission is to provide sound and dependable credit to American farmers, ranchers, and producers or harvesters of aquatic products, and farm-related businesses through a member-owned cooperative system. This is done by making loans and providing financial services to creditworthy individuals and businesses. Through its commitment and dedication to agriculture, the System continues to have the largest portfolio of agricultural loans of any lender in the United States. As the System’s independent safety and soundness federal regulator, the Farm Credit Administration (FCA) supervises, examines, and regulates System institutions.

Our Structure

As a cooperative, we are owned by the members we serve. We emphasize our cooperative structure by providing superior service at competitive rates and then, when circumstances allow, paying significant cash patronage. Patronage of $51 million was declared in 2012 and will be distributed to customers in 2013 – about 0.75% of their average 2012 borrowings.

Our chartered territory covers a diverse area in parts of California and Nevada, though it is primarily concentrated in the southern San Joaquin Valley, Central Coast and Sacramento Valley. Note 1 to the financial statements includes a more detailed description of our chartered territory.

We make production and intermediate-term loans for agricultural production or operating purposes and long-term real estate mortgage loans to farmers, ranchers, rural residents, and agribusinesses. Additionally, we provide other related services to our borrowers. Our success begins with our extensive agricultural experience and market knowledge; satisfying our customers is of paramount importance.

The primary funding source for our lending and operations is our direct note from CoBank, ACB (CoBank). CoBank is a cooperative of which we are an owner and member. Prior to its merger with CoBank on January 1, 2012, U.S. AgBank, FCB (AgBank) was our funding bank. Effective January 1, 2012, AgBank merged with and into CoBank, FCB, a wholly owned subsidiary of CoBank, ACB. As a result of the merger, our investment in AgBank stock was converted to CoBank stock. The financial condition and results of operations of CoBank materially affect the risk associated with shareholder investments in Farm Credit West. Shareholders of Farm Credit West may obtain copies of CoBank’s financial statements free of charge by calling 916-780-1166 or by writing to Farm Credit West, 1478 Stone Point Drive, Suite 450, Roseville, CA 95661, or by accessing CoBank’s website at www.cobank.com.

We purchase technology and other operational services from Financial Partners, Inc. (FPI), which is a technology service corporation. We are a shareholder in FPI along with other FPI customers. In addition, we purchase payroll and other human resource services from Farm Credit Foundations, a human resources service provider which serves a number of System entities.

Fulfillment of Our Public Policy Purpose/Mission

A healthy America requires a strong agricultural economy. Congress enacted the Farm Credit Act to help ensure an effective credit delivery system dedicated to financing rural America that will further the public interest. We strive to ensure our mission statement is met through operational strategies which focus on public policy fulfillment, customer service, maintaining a fiscally sound organization, and attracting, developing, and retaining high quality directors and staff.

For public policy fulfillment, our operational strategies focus on being a responsible organization meeting our chartered purpose of legally and ethically serving the needs of rural America.

For customer service, our operational strategies focus on providing superior value-added service to all eligible


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customers within our chartered territory, with emphasis on outreach to young, beginning, small, and minority agricultural producers (as discussed in the Young, Beginning, and Small Farmer and Rancher Program section of this report). We are dedicated to being responsive to the needs of customers and potential customers as well as to meeting market forces.

For maintaining a fiscally sound organization, our operational strategies focus on using resources efficiently to build a safe and sound organization that is positioned to consistently provide “superior customer service at competitive interest rates.”

For human resource strategies, we emphasize the need to attract, develop, and retain the people required to ensure success in meeting our public policy purpose and mission, serving customers, and maintaining fiscal stability. We are striving to develop diverse human resources.

As more fully detailed throughout this Annual Report, our performance is consistent with our public policy responsibilities. Results achieved are reflective of consistent progress.

Governance

Board of Directors Oversight and Independence

We are governed by a 15-member Board of Directors (Board) that oversees the management of our Association. Of these directors, 13 are elected by the stockholders and two are appointed by the elected directors.

The Board maintains three committees: a Corporate Governance Committee, a Human Capital and Compensation/ Evaluation Committee, and an Audit Committee. These committees are discussed in greater detail in the Disclosure Information Required by FCA Regulations section of this Annual Report. The Board and the three Board committees meet regularly to oversee and discuss our strategic plans, operating plans and performance, financial reporting, legal and regulatory compliance, chief executive officer compensation and evaluation, issues faced, and risks managed.

The Board has adopted a Charter and a Code of Ethics to support their leadership and oversight roles in the accomplishment of our mission. In their Code of Ethics, the Board, and each director, commits to conduct business in accordance with the highest ethical standards.

All directors must exercise sound judgment in deciding matters in our interest. All our directors are independent from the perspective that none of our management or staff serve as Board members. However, we are a financial service cooperative, and the Farm Credit Act and FCA

Regulations require our elected directors to have a loan relationship with us.

The elected directors, as borrowers, have a vested interest in ensuring our Association remains strong and successful. However, our borrowing relationship could be viewed as having the potential to compromise the independence of an elected director. For this reason, the Board has established independence criteria to ensure that a loan relationship does not compromise the independence of our Board. In accordance with our Board of Directors’ Charter, annually, in conjunction with our independence analysis and reporting on our loans to directors, each director provides financial information and any other documentation or assertions needed for the Board to determine the independence of each director (as defined in the Charter). Following the most recent analysis of established criteria, the Board determined that each of our directors met the independence criteria.

Governance and Financial Reporting Control

The Board has monitored the requirements of public companies under the Sarbanes-Oxley Act. While we are not subject to the requirements of that Act, we have implemented the following steps to strengthen governance and financial reporting: (1) a system for the receipt and treatment of anonymous “whistleblower” complaints; (2) a code of ethics for our directors; (3) open lines of communication between the independent auditors, the Board’s Audit Committee, and management; (4) this “plain English” annual report to stockholders; (5) officer certification of accuracy and completeness of the financial statements; and, (6) information disclosure through our website.

Loan Portfolio

Loan, Lease, and Investment Security Volume

We offer production, intermediate-term, and long-term loan products to stockholders/borrowers for qualified agricultural purposes within our chartered territory. Current product options include variable and fixed interest rates. Loans are also made for rural homes, farm-related businesses, and agricultural processing and marketing operations. Our portfolio also contains leases and purchased loans (participations purchased). Our loan and lease volume outstanding was $6.1 billion at December 31, 2012 compared with $5.7 billion at December 31, 2011, a 7% increase. At year-end 2010, loan and lease volume of $5.5 billion was outstanding.

In 2003 and 2006, we exchanged mortgage loans for Federal Agricultural Mortgage Corporation (Farmer Mac) guaranteed mortgage-backed securities, which impacted our volume of loans and leases. We continue to service the loans included in those transactions. These investments in guaranteed securities are included in this report’s Consolidated Balance Sheet as either investment securities – available-for-sale or


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investment securities – held-to-maturity. On three occasions, we have sold portions of those investment securities to AgBank (now CoBank) to reduce the amount of securities held.

We have consistently been successful in marketing and competitively pricing loan products to those agricultural producers who generate significant economic activity in our chartered territory. The $6.3 billion combined volume of loans and securities at December 31, 2012 was a 6% increase over year-end 2011. The $5.9 billion combined volume of loans and securities outstanding at December 31, 2011 was a 2% increase over the December 31, 2010 volume of $5.8 billion. While loan volume growth has slowed in recent years, the increases in 2011 and 2012 are consistent with a long-term trend of successful marketing to our target markets as well as net increases in our capital markets portfolio.

The types of loans outstanding at December 31 are reflected in the following table.

December 31, 2012 2011 2010

Real estate mortgage loans 58.0% 57.6% 57.1%Production and intermediate-term loans 22.4% 24.8% 27.1%Agribusiness loans: Processing and marketing 10.3% 10.7% 10.1% Farm related businesses 4.3% 3.8% 3.8% Loans to cooperatives 1.4% 1.1% 0.6%Direct financing leases 2.0% 1.7% 1.3%Communication loans 1.2% 0.3% 0.0%Energy loans 0.4% 0.0% 0.0%

Total 100.0% 100.0% 100.0%

Percentage of Principal Outstanding

Long-term farm mortgages generally finance the purchase of farm real estate, refinance existing mortgages, help construct various facilities used in agricultural operations, and help purchase other rural residential real estate for both full-time and part-time farmers. Production and intermediate-term loans are generally made for operating funds, equipment financing, and other purposes. Agribusiness loans are comprised of loans to processors and marketers, farm-related businesses, and cooperatives.

Portfolio Diversification

While we make loans and provide financially-related services to qualified customers in agricultural and rural sectors and to certain related entities, our loan portfolio is diversified by commodity, geographic locations, and participations purchased and sold, as illustrated in the following tables.

Farm Credit West’s outstanding loan volume percentage by commodity segment is shown in the following table. The table reflects a loan portfolio that is diversified among major commodities or types of agriculture. Repayment ability of

our customers is closely related to the production and the profitability of the commodities they raise. If a loan fails to perform, restructuring or other servicing alternatives are influenced by the underlying value of the collateral which is impacted by industry economics. While management is committed to maintaining sound credit quality, future performance would be negatively impacted by adverse agricultural conditions. The degree of the adverse impact would be correlated with the specific commodities impacted and the magnitude and duration of the impact.

December 31, 2012 2011 2010

Dairy 18.9% 19.3% 20.3%Edible tree nuts 14.4% 13.4% 12.9%Processing and marketing 10.3% 10.7% 10.1%Vegetables 7.2% 7.4% 7.5%Field/feed crops 6.4% 6.8% 7.4%Wine grapes 5.6% 5.8% 6.1%Livestock 4.9% 5.3% 5.2%Wine 4.4% 4.4% 4.5%Farm related business 4.3% 3.8% 3.8%Flowers/nursery 3.6% 3.8% 3.8%Tree fruit 3.2% 3.2% 3.0%Table grapes 3.1% 3.3% 3.3%Citrus 2.9% 2.8% 2.8%Rice 2.5% 2.4% 2.3%Direct financing leases 2.0% 1.7% 1.3%Cotton 1.8% 1.8% 1.8%Avocados 1.6% 1.6% 1.8%Prunes 1.5% 1.6% 1.3%Forest products 1.4% 0.9% 0.8%

Total 100.0% 100.0% 100.0%


The geographic distribution of loans by county is illustrated in the following table.

December 31, 2012 2011 2010

Tulare 26.3% 24.9% 23.5%Kern 11.9% 12.3% 12.1%Santa Barbara 7.2% 7.2% 7.1%San Luis Obispo 6.6% 7.3% 7.7%Ventura 6.5% 6.4% 6.2%Kings 5.4% 5.4% 5.8%Sutter 5.0% 4.6% 4.3%Los Angeles 2.9% 2.9% 2.9%Yolo 2.4% 2.5% 2.3%Butte 1.7% 1.6% 1.2%Sacramento 1.3% 1.4% 1.7%Yuba 0.9% 0.9% 0.9%Solano 0.7% 0.9% 0.8%Placer 0.5% 0.6% 1.0%Other 20.7% 21.1% 22.5%

Total 100.0% 100.0% 100.0%



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Economic Overview

The most recent Farm Bill was passed over a Presidential veto in the early part of 2008 and was intended to provide support for a continuation of recent trends. Since its passage, commodity prices (corn, soybeans, wheat, rice, etc.) have fluctuated with substantial strength in 2008, moderation in 2009 and then resumed strength in the latter half of 2010, 2011 and 2012. Some of the recent strengthening has been the result of the decline in value of the dollar against most other major currencies and resulting increased export opportunities. Land values in the traditional “Farm Belt” experienced some decline in 2009, but strengthened again in 2010, 2011 and 2012 corresponding with increases in commodity prices. Land price volatility is likely to continue until stability returns to the commodity markets and until unemployment is reduced and the economy improves.

Agriculture in the area served by Farm Credit West is generally less susceptible to declines than most areas of the U.S. because of the diversity in commodities produced and the relatively low level of dependence on government support programs (other than cotton and rice). Land values in some portions of the territory are influenced by the proximity to the ocean on the west and to the Los Angeles metropolitan area on the south. While urban growth in the Sacramento and San Joaquin Valleys caused upward pressure on urban fringe property values in recent years, that trend stopped in 2008. Those properties continued to decline from 2009 through 2011 and have only recently begun to stabilize.

Dairy operations experienced significant declines in liquidity and equity during the last quarter of 2008 and most of 2009. Milk prices rebounded in 2010 and 2011, helping most operations break-even or experience some profitability. In spite of the improvement, earnings have not been sufficient to make any significant financial recovery. The market for grain and dairy products remains volatile. The California dairy industry experienced another downturn in 2012 with milk prices for most dairy operators falling below cost of production for the majority of the year, further depleting their equity. The situation was compounded by the drought in the Midwest which increased the price of grain by 150% and also increased the value of local forages such as silage and hay. With many operations coming into 2012 with limited equity, the downturn has caused more operations to liquidate or to file for bankruptcy. In addition, the ongoing financial stress has negatively impacted the value of dairy facilities in California with values dropping significantly from the peak in 2008 and 2009. The outlook going into 2013 is continued financial stress with milk prices peaking in late 2012 and declining into 2013. Lower prices, coupled with continued high feed costs, projects break-even at best for the average California dairyman in 2013. A return to profitability will require increased pricing for dairy products or a drop in feed prices which is not expected until the second half of 2013 under a best-case scenario. The dairy real estate market is

expected to remain soft in 2013 and further decreases in facility values will place additional pressure on the equity and leverage positions of most operators.

The 2012 almond crop is expected to be 10% lower than early-2012 forecasts. Upon news of the smaller than expected crop, 2011 and 2012 crop prices increased. Looking back at the 2011 crop year (2012 marketing year), global demand for California almonds has grown to a new record level. Crop shipments have increased by an average of 11% for the past three years. Industry experts are projecting record shipments again for the 2012 crop. With a manageable carryover from the 2011 crop and lower than originally expected 2012 crop, almond prices are expected to remain very strong.

The 2012 pistachio crop is estimated to be down 10% from estimates earlier in 2012. Looking back at the 2011 crop year (2012 marketing year), global shipments increased 24% over the 2010 crop year. The global shipments have increased by an average of 14% in the past three years. Industry experts project that shipments for the 2012 crop will continue to increase. The 2012 base price is strong, and with bonuses, will allow pistachio growers to operate at well above break-even. Looking ahead, due to the cyclical nature of pistachio trees, the 2013 crop is expected to be 13% lower than 2012 which would create an environment for prices to remain strong.

California walnut production for 2012 is expected to be up slightly from 2011 levels but still below 2010 record production. Growing and harvest conditions in 2012 were favorable. Initial reports of a lighter crop and low inventory stocks contributed to the continual increase in grower prices. Strong consumer demand continues due to the health benefits of walnuts and growing world markets. The Walnut Bargain-ing Association anticipates continued increased demand and good movement at good prices to the grower.

Diversified vegetable farmers are experiencing largely mixed results in 2012. Farmers with favorable contracts weathered the year well, while those who sell on the open market are showing small losses to break-even results. Consumer trends continue to support growth in processed/bagged/prepared vegetables. Water shortages in some Central Valley locations have shifted more product demand to coastal regions which has opened up steady and positive pricing windows. Growers are also experiencing increased demand for organic products, although the price differential from conventionally-grown vegetables is nominal. The outlook remains positive, but still volatile, for vegetable producers due to high input costs, increasing labor shortages, and occasional low commodity prices. Overall, 2012 growing conditions for California processing tomatoes were satisfactory, however there were spots of severe disease pressure. Grower prices for 2013 are expected to be similar to last year at about, or slightly above, break-even.


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Grower returns for alfalfa hay in 2012 were down 10% from the unprecedented highs realized in 2011. Factors influencing hay in early 2012 were greater availability as early cuttings came off with very few problems, as well as the drop in demand from dairy operators as milk prices were at their lowest points in early 2012. In late 2012, hay prices rose as a result of the overall increase in the grain markets which pulled up the value of forage crops. Despite solid returns for hay growers in 2011-2012, acreage in 2013 is expected to stay flat due to the strength in prices of alternative commodities and the concern over the ability to collect from dairy operators. Water conditions in the West will also play a factor in availability, and thus price, of alfalfa hay. For 2013, prices are expected to remain at levels experienced in 2012, with the largest factor being its positive correlation to dairy profitability

The wine grape harvest in 2012 was average to above average after successive short crop years that left the incoming bulk wine supply at the lowest levels in ten-plus years. Bulk wine prices stabilized during harvest after six to 12 months of escalation. Grape growers are expected to show profitability throughout the state, with a few exceptions. The key commodity-pricing factors continue to be the quality of wine produced and the relationship of the grower with the winery. Growers that struggled to sell grapes when bulk wine was in oversupply have been absorbed into the market, and many have locked in multi-year growing contracts. Some wine economists believe that demand for wine will continue to increase at a more rapid rate than plantings, reducing the risk of oversupply.

The cow/calf sector continues to realize profits for low cost producers. Beef production declined again in 2012 for the third consecutive year and cattle numbers are at historic lows. Stocker cattle should show profitability in 2012 and into 2013 with tight supplies supporting higher market prices. Western states experienced below-average rainfall in 2012, and if that trend continues, the profitability of stocker sector will be negatively impacted. Feeder cattle, properly hedged, showed profitability for the 2012 fiscal year and proper risk management strategies should be utilized by borrowers going forward. Feedlots are at break-even to non-profitable levels in late 2012 driven primarily by the high cost of purchasing cattle. Declining fed cattle numbers and improved export demand appear to be pushing fed cattle prices higher going into 2013. Overall, further economic recovery and increased market expansion are necessary to maintain prices and continue profitability in 2013.

Cut flower growers saw sales increase the past three years following declines in 2008 and 2009. The increase was driven by a stabilized economy and on-farm production of more bouquets which add value over bulk stem sales. Profit trends however continued to be moderated by low price South American imports which make up roughly 70% of U.S. sales, as well as the higher cost involved in bouquet

production. Prices for greenhouse vegetables were stable for most commodities in 2012, reflecting consumer and retailer demand for a steady, year-round supply of high quality product. Ornamental container nursery sales appeared to stabilize in 2012 as growers continued to adjust their product mix and inventory to match reduced demand. This follows a pronounced sales decline and destruction of unsalable inventory in 2009 resulting from the economic downturn and its negative impact on home values, new construction, and consumer spending.

The deciduous tree fruit industry (peaches, plums, nectarines, etc.) is continuing to consolidate as larger growers are buying farm land from smaller growers. There are about fifteen major growers, packers and shipping companies in the industry who make up about 95% of the total production. The top five entities make up about 75%. Total production for 2013 is expected to be on par with last year’s production. Fruit-bearing acreage has decreased as growers move to newer varieties and some production areas have moved to citrus and nut crops. The 2012 season saw a strong marketing year for most growers. Growers with good varieties and good marketing channels continued to be profitable.

Unlike the prior two seasons, the California table grape season started around a more normal timeframe in 2012. Spring weather conditions were warm and dry and conducive to good quality and condition for most varieties and areas. Prices started at good levels and improved starting in late August to unusually high levels. Demand was good for all varieties of table grapes. Export markets remain strong with consistent demand and pricing, although domestic pricing approached export price levels in late season. Value added programs and a shift to consumer-driven packs of fixed weight continue to gain traction and are a profitable endeavor.

In 2012, California rice got off to a good start as the weather allowed for a normal planting schedule. Early fall rains and green rice pushed harvest well into November. Rice quality and yield were down slightly. However, price has improved somewhat over prior estimates. The 2012 California rice crop is estimated to have decreased 3% compared with 2011. The grower price outlook for the 2012 crop is expected to increase 5% over last year’s level.

Cotton acreage increased significantly in 2011 due to higher cotton prices, additional water supplies and several years of declining stocks. The high prices in 2011 led to an increased worldwide planting of cotton and also slowed demand, which in turn resulted in an increase in projected ending stocks and a reduction in price entering 2012. Despite lower prices in 2012, cotton producers in California were profitable due to excellent yields and quality. With cotton prices at current levels and strong alternative commodity prices (grains, tomatoes, silages, permanent plantings), acreage is expected


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to decline by a significant amount in California and the U.S. in 2013.

California avocado growers in 2012 experienced a 30% increase in production compared with 2011. Prices were moderate, but showed a significant decline from the very strong prices received in 2011. Operating costs continue to increase, but remain manageable.

Following the 2011 prune crop, approximately 5% of total prune acreage was removed and replanted to more profitable crops. With decreased acreage and lower yields per acre due to weather fluctuations, total tonnage was down 12% in 2012. Based on the current market, prune prices for 2012 should be higher than 2011.

Foreign competition remains a major concern for a number of commodities including cut flowers, citrus, avocados, selected vegetables, cotton, raisins, wine, and nuts. The weak dollar in the past has helped exports considerably for all agricultural commodities. An increase in the strength of the dollar could weaken demand and returns for many operations.

We purchase participation interests in loans from other System and non-System entities to generate additional earnings and in some cases diversify risk related to existing commodities financed and our geographic area served. In addition, we sell a portion of certain large loans and a portion of our lease portfolio to other System entities and, occasionally, non-System entities, to reduce risk and comply with lending limits we have established. The following table summarizes our three-year history with respect to loan and lease participations outstanding. Participations purchased volume includes loan syndications.

December 31, (in thousands) 2012 2011 2010

Participations purchased 682,356$ 537,489$ 410,144$ FCW-originated participations sold (1,061,183) (1,021,047) (940,426)

Net participations sold (378,827)$ (483,558)$ (530,282)$

Throughout the reporting period, we have pursued a strategic initiative to position ourselves to benefit from enhanced participation relationships with CoBank. It is management’s conclusion that we are adequately compensated for participation interests sold relative to the incremental cost of servicing the “sold” portions of those assets. Accordingly, no servicing asset or liability has been established related to participations sold or purchased.

Farm Credit West’s loan portfolio is diversified to a considerable extent both geographically and by commodity. The average loan (including loan volume serviced for others) had $0.8 million outstanding at year-end 2012. This is a relatively large average loan size, but management does not consider this concentration to be of significant concern given

portfolio asset quality, commodity diversity, and collateral values underlying the portfolio. Eight percent of our loan volume is attributable to our ten largest customers. The financial failure of any of these borrowers could materially affect our future operating results. As discussed in the Credit Risk Management section below, management has implemented processes to help control loan size and commodity concentrations.

Portfolio Quality

We review the credit quality of the loan portfolio on an ongoing basis as part of our risk management practices. Each loan is classified according to the Uniform Classification System, which is used by all Farm Credit System institutions. Below are the classification definitions.

Nonadversely Classified Assets

Acceptable – Assets are expected to be fully collectible and represent the highest quality.

Other Assets Especially Mentioned – Assets are currently collectible but exhibit some potential weakness.

Adversely Classified Assets

Substandard – Assets exhibit some serious weakness in repayment capacity, equity, or collateral pledged on the loan.

Doubtful – Assets exhibit similar weaknesses to substandard assets. However, doubtful assets have additional weaknesses in existing facts, conditions and values that make collection in full highly questionable.

Loss – Assets are considered uncollectible.

As shown in the following table, the credit quality of our loan portfolio (principal and interest) declined by 0.5% in 2011 and improved by 0.6% in 2012.

December 31, 2012 2011 2010

Nonadversely classified 94.7% 94.1% 94.6%Adversely classified 5.3% 5.9% 5.4%

Adversely classified assets were 5.3% of loans at December 31, 2012. While improved from 2011, this level of adverse assets remains higher than our longer-term experience. Economic conditions over the last few years have created challenges for some borrowers and have contributed to the higher levels of adversely classified loan volume. Much of the decline in credit quality is a result of stress in the dairy industry. Dairy comprises 19% of our total loan portfolio, but 52% of our adversely classified loan volume at December 31, 2012. Despite the recent downturn, Farm Credit West’s December 31, 2012 loan quality of 94.7% nonadversely classified is still considered relatively strong based on regulatory standards.


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Nonearning Assets

The table below summarizes Farm Credit West’s three-year history of year-end nonearning assets.

December 31,(dollars in thousands) 2012 2011 2010

Other property owned 28,974$ 64,140$ 82,827$ Nonaccrual loans 127,194 123,355 107,938

Total 156,168$ 187,495$ 190,765$

Total as a percentage of total assets 2.34% 2.98% 3.11%

Total as a percentage of total members' equity 12.92% 16.82% 19.93%

Other property owned is comprised of real or personal property that has been acquired through foreclosure, deed in lieu of foreclosure, or other means. Nonaccrual loans represent all loans where there is a reasonable doubt as to collection of principal and interest.

The volume of nonearning assets decreased $31.3 million in 2012 and $3.3 million in 2011 after having increased $58.3 million in 2010. The current level of nonearning assets, while manageable, has a negative impact on earnings. Management initiatives are in place to continue to reduce the level of nonearning assets.

During 2012, other property owned decreased $35.1 million from $64.1 million at December 31, 2011 to $29.0 million at December 31, 2012. The decrease included $35.8 million in property dispositions during the year which were partially offset by the acquisition of one $5.1 million parcel of pasture/environmental mitigation property. In 2011, other property owned decreased $18.7 million. We are actively marketing all other property owned assets and intend to dispose of all properties in an orderly and timely fashion.

During 2012, we recorded losses of $4.1 million to recognize lower estimated net realizable values on several assets held in other property owned. During 2011 and 2010, we also recorded losses of $7.5 million and $4.4 million, respectively, to recognize lower estimated net realizable values. The operation and sale of other property owned generated gains of $0.9 million in 2012, and losses of $1.3 million in 2011 and $0.3 million in 2010.

Nonaccrual volume increased $3.8 million in 2012 as $65.8 million in loans were transferred into nonaccrual status. Substantially offsetting the transfers into nonaccrual were net repayments of $43.1 million, charge-offs of $12.7 million, and property acquisitions of $5.1 million. In general, we are adequately secured on much of the $127.2 million in nonaccrual loan volume outstanding at December 31, 2012. However, we have established specific loan loss allowances of $13.9 million in relation to $48.1 million of the nonaccrual portfolio.

In 2011, nonaccrual volume increased $15.4 million, mainly related to loans in the nursery and beef cattle segments.

At December 31, 2012, restructured accrual loan volume was $6.0 million. During 2010 and 2011, there were no restructured accrual loans outstanding. At December 31, 2012, loans totaling $0.9 million were 90 days past due and accruing interest. At December 31, 2011, loans and leases totaling $6.5 million were 90 days past due in accrual status, and at December 31, 2010, accrual loans and leases totaling $3.4 million were 90 days past due.

Allowance for Loan Losses and Loss Experience

The allowance for loan losses for the three most recent years is detailed below. The allowance is our best estimate of the amount of probable losses existing in, and inherent in, our loan portfolio as of the balance sheet date. We determine the allowance based on a regular evaluation of the loan portfolio, which generally considers recent and historic charge-off experience among other relevant factors. See Note 2 to the financial statements for more detailed information regarding determining the allowance for loan losses.

Charge-offs net of recoveries totaled $12.4 million in 2012, $17.6 million in 2011, and $19.8 million in 2010. Net loan charge-offs in the last three years have been related mostly to loans in the beef cattle, dairy, and nursery segments. Charge-offs and recoveries by loan type are detailed in the following table.

(dollars in thousands) 2012 2011 2010

Balance at beginning of year 29,600$ 24,200$ 21,000$

Provision for loan losses 16,046 22,975 23,049 Charge-offs: Production and intermediate-term loans (10,802) (14,592) (9,142) Real estate mortgage loans (1,878) (1,747) (432) Agribusiness loans — (1,087) (10,982) Direct financing leases (43) (360) (154) Total charge-offs (12,723) (17,786) (20,710) Recoveries: Production and intermediate-term loans 191 102 811 Agribusiness loans 86 109 47 Direct financing leases — — 3 Total recoveries 277 211 861 Net charge-offs (12,446) (17,575) (19,849)

Balance at December 31 33,200$ 29,600$ 24,200$

Net charge-offs to average loans 0.22% 0.32% 0.37%


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The amount of the allowance by loan type is detailed in the following table.


Production and intermediate-term loans 17,884$ 18,350$ 13,813$ Real estate mortgage loans 9,082 6,725 6,063 Agribusiness loans 5,086 3,825 3,727 Direct financing leases 1,016 631 597 Communication loans 74 22 — Energy loans 58 47 —

Total allowance for loan losses 33,200$ 29,600$ 24,200$

The allowance as a percentage of loans outstanding and as a percentage of certain other credit quality indicators is shown below.

December 31, 2012 2011 2010

Allowance as a percentage of: Total loans 0.55% 0.52% 0.44% Total impaired loans 24.77% 22.80% 21.73% Nonaccrual loans 26.10% 24.00% 22.42%

While the financial position of agricultural producers remained relatively strong during 2012 for most of the commodity segments we finance, we have seen significant declines in the dairy, beef cattle and winery segments over the past few years. Accordingly, we increased the allowance for loan losses to recognize the increased risk of losses in the weaker commodity segments. Based on the current economic outlook and our continued emphasis on sound underwriting standards and prompt risk identification, we expect our loss exposure to improve in 2013, though it will likely remain higher than historical averages. Net charge-offs were 0.22% of average loans in 2012 and 0.32% in 2011.

Credit Risk Management

The credit risk in our portfolio arises from the potential failure of a borrower to meet repayment obligations that result in a financial loss. Credit risk is actively managed on an individual and portfolio basis through application of sound lending and underwriting standards, policies, and procedures. Underwriting standards are developed and utilized to determine an applicant’s operational, financial, and management resources available for repaying debt within the term of the notes and loan agreement. Processes are established and followed for information gathering, balance sheet and income statement verification, loan analysis, credit approvals, disbursement of proceeds, and subsequent loan servicing actions. Underwriting standards vary by industry and are updated periodically to reflect market and industry conditions. Among other things, those standards evaluate the following.

Character – borrower integrity and credit history;

Capacity – repayment capacity of the borrower based on cash flows from operations or other sources of income;

Collateral – to protect the lender in the event of default and also serve as a secondary source of loan repayment;

Capital – ability of the operation to survive unanticipated risks; and,

Conditions – intended use of the loan funds, terms, and restrictions.

To help manage and diversify credit risk, our credit risk management framework includes securitizing loans, credit guarantees, and loan participations.

At December 31, 2012, we owned $231 million in Farmer Mac guaranteed securities. These securities arose as part of three securitization transactions in which a total of $1.4 billion of mortgage loans were exchanged for Farmer Mac guaranteed securities. All three transactions occurred prior to 2007. By the end of 2007, we had sold $649 million of those Farmer Mac securities to AgBank (now CoBank).

At December 31, 2012, risk reduction was achieved on an additional $95 million of loan volume, which was covered under a Long Term Standby Commitment to Purchase agreement (LTSCP) with Farmer Mac. That guaranteed volume totaled $98 million at December 31, 2011 and $100 million at December 31, 2010. The LTSCP guarantee gives us the right to sell the loans identified in the agreement to Farmer Mac in the event a delinquency of four months occurs.

The securitization program and the Farmer Mac standby loan guarantees reduce portfolio risk in return for a reduction in interest income.

Participation activity, as well as the transactions with Farmer Mac, helps reduce portfolio risk from commodity, geographic, and loan size concentrations.

Our volume of transactions with Farmer Mac presents counterparty risk. The Farmer Mac risk is “secondary” in that we rely primarily on customer loan repayments. As part of our counterparty risk policy, during 2012, we completed an analysis of our relationship with Farmer Mac. That analysis found that our counterparty risk with Farmer Mac was within policy guidelines related to potential impacts on capital and potential impacts on return on equity. Other than the contractual obligations arising from these Farmer Mac business transactions, Farmer Mac is not liable for any debt or obligation of ours and we are not liable for any debt or obligation of Farmer Mac. For more information on Farmer Mac, refer to their website at www.farmermac.com.


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Fees paid to Farmer Mac for loans and securities related to loans we originated (including fees related to securities now owned by CoBank) totaled $2.2 million in 2012, $2.6 million in 2011, and $2.9 million in 2010.

The majority of the loans we originate are farm real estate loans secured by a first mortgage on the pledged collateral. Production and intermediate-term lending accounts for most of the remaining volume and is also typically secured. Collateral evaluations are made within FCA and Uniform Standards of Professional Appraisal Practices requirements. All property is appraised at market value. All collateral evaluations are performed by a qualified appraiser. Certain appraisals must be performed by individuals with a state certification or license.

Over the years, we have taken several actions to analyze and reduce the overall level of risk inherent in the loan portfolio.

We have established internal lending limits that are considerably lower than those established by regulation or lending delegations from CoBank. Our limits differentiate among customers based on risk. We have adopted an individual loan size maximum of approximately 5% of risk funds for our highest quality customers. However, the loan principal outstanding on three loan complexes exceeded 5% of risk funds at December 31, 2012 – our largest complex equaled 5.6%. Risk funds are defined as permanent capital plus the allowance for loan losses.

We have established internal lending delegations to properly control the loan approval process. Delegations to staff are based on our risk-bearing ability, loan size, complexity, type and risk, as well as the expertise of the credit staff member. Larger and more complex loans are typically subject to our prior approval process, which involves review and approval by our most experienced and knowledgeable credit staff.

We believe we have been a System leader in developing enhanced methods of assessing loan-by-loan risk across the portfolio. We use a Combined System Risk Model (model) to assess risk. The model is a two dimensional risk rating system that measures each loan’s probability of default (the likelihood of a borrower defaulting in the next twelve months) and loss given default (an estimate of the anticipated loss on each loan, should the borrower default in the next 12 months). The model is utilized in loan and portfolio management processes (including allowance for loan losses estimates) providing a more detailed risk evaluation, particularly related to loans classified Acceptable under the Uniform Classification System. Information from the model is integrated into the Economic Capital analyses we use; our use of Economic Capital analyses is discussed in more detail below.

Results of Operations

Net Income Summary

As shown in the table below, net income for 2012 was $151 million, compared with $177 million in 2011, and $106 million in 2010. The following is a summary of major components of change in net income over the last three years.

2012 2011 2010versus versus versus

(in thousands) 2011 2010 2009

Net income, prior year 176,849$ 105,818$ 92,188$

Increase (decrease) due to: Net interest income 5,925 13,794 9,158 Provision for loan losses 6,929 74 (1,104) Noninterest income (40,857) 63,282 3,942 Noninterest expense 3,438 (6,716) 2,372 Provision for income taxes (812) 597 (738) Total (decrease) increase in net income (25,377) 71,031 13,630

Net income, current year 151,472$ 176,849$ 105,818$

The earnings shown above are before patronage payments of $51 million to be made from 2012 earnings, $33 million which were paid from 2011 net income, and $32 million which were paid from 2010 net income. Net income also does not include other comprehensive loss of $2 million recorded in 2012, other comprehensive income of less than $1 million recorded in 2011, or $1 million in other comprehensive loss recorded in 2010. Further, preferred stock dividends paid from net income totaled $4 million in 2012, $5 million in 2011, and $4 million in 2010.

The following table reflects our earnings history relative to asset and equity levels.

Year ended December 31, 2012 2011 2010

Net income as a percentage of: Average assets 2.40% 2.92% 1.75% Average members’ equity 12.71% 16.80% 11.23%

Net income decreased $25.4 million in 2012 following an increase of $71.0 million in 2011 and a $13.6 million increase in 2010.

The key components in the $25.4 million year-over-year decrease in net income (and the corresponding decrease in ROA) are as follows:

In December 2011, we recorded $34.0 million in income from a non-recurring AgBank recapitalization distribution. Pursuant to the merger between CoBank and AgBank, AgBank undertook the recapitalization transaction in order to align all associations with CoBank's stock investment requirement. The


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recapitalization involved the tax-free issuance of AgBank common stock to each association in exchange for an equal amount of attributed unallocated retained earnings (URE) previously allocated on a patronage basis to such association. The attributed URE was AgBank equity representing prior year earnings. The exchange results in noninterest income being recognized and a corresponding increase in the Investment in AgBank (now CoBank).

In 2012, we recorded $21.5 million in CoBank direct note patronage, a $15.6 million decrease in noninterest income compared with the $37.1 million in bank direct note patronage recorded in 2011. In March 2011, we received cash patronage of $23.3 million relating to 2010 bank earnings and in December 2011, we also accrued $13.8 million in cash patronage declared by AgBank (now CoBank) relating to 2011 bank earnings.

Partially offsetting the decreases noted above:

Loan loss provisions were $6.9 million lower in 2012 than 2011, primarily due to lower loan charge-offs.

During 2012, we received a non-recurring $6.2 million distribution from the Farm Credit Insurance Fund which was included in noninterest income.

Net interest income increased $5.9 million mainly due to an increase in average earning assets.

Importantly, net interest income increased in all three years presented; the components of the changes in net interest income are discussed below.

For 2011, the $71.0 million increase in net income was primarily due to the $34.0 million in non-recurring AgBank recapitalization distribution, a $32.8 million increase in AgBank patronage and a $13.8 million increase in net interest income.

The 2010 increase of $13.6 million was primarily due to a $9.2 million increase in net interest income and a non-recurring $5.7 million distribution from the Farm Credit Insurance Fund.

Net Interest Income

Net interest income increased in absolute dollar terms in each of the years 2012, 2011, and 2010. The net interest margin decreased slightly (0.02%) to 2.78% in 2012 from 2.80% in 2011 following a 0.24% increase from 2010 to 2011. Throughout 2010, 2011 and 2012, market interest rates remained at historic low levels which resulted in higher interest rate spreads than in previous years. However, in 2012, the interest rate spread decreased slightly (0.02%) to 2.54% compared with 2.56% in 2011. The interest rate spread had increased 0.26% in 2011, from 2.30% in 2010.

The following tables also show our growth in average total interest earning assets and average equity financing.

Average(dollars in thousands) Balance Interest Rate

Net interest income componentsInterest earning assets: Loans and leases 5,742,606$ 235,468$ 4.10% Investment securities 248,286 10,266 4.13% Total interest earning assets 5,990,892 245,734 4.10%

Interest-bearing liabilities: Note payable to CoBank/

AgBank and other 4,778,302 76,199 1.59% Future payment funds 325,393 3,261 1.00% Total interest-bearing liabilities 5,103,695 79,460 1.56%

Interest rate spread 2.54%

Impact of equity financing 887,197$ 0.24%

Net interest income and net interest margin 166,274$ 2.78%

2012



Interest-bearing liabilities: Note payable to CoBank/

AgBank and other 4,761,022 89,172 1.87% Future payment funds 217,660 2,175 1.00% Total interest-bearing liabilities 4,978,682 91,347 1.83%




2011

Since 2009, the financial market for debt instruments has remained fairly stable. Combined with the growth in earning assets, an adequate spread is an important component of our net interest income and net income growth. The historically low interest rate environment prevalent since 2009 has reduced the impact of equity financing on net interest income despite higher levels of average equity. For 2012, the Association’s average equity financing increased primarily due to net earnings.


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For 2011, our average equity financing increased due to net earnings plus higher member investment balances in our preferred stock program.



Interest-bearing liabilities: Note payable to CoBank/ AgBank and other 4,884,310 109,370 2.24% Future payment funds 173,383 1,732 1.00% Total interest-bearing liabilities 5,057,693 111,102 2.20%




2010

The following table provides a breakdown of changes in net interest income over the three most recent years based on: (1) changes in the dollar volumes of assets and liabilities and (2) changes to interest rates acting on those assets and liabilities.

2012 2011 2010versus versus versus

(in thousands) 2011 2010 2009

Net interest income, prior year 160,349$ 146,555$ 137,397$

Increase (decrease) due to: Changes in volume of assets and liabilities 8,325 2,030 4,680 Changes in interest rates (1,486) 10,636 7,114 Changes in income on nonaccrual loans (914) 1,128 (2,636) Total increase in net interest income 5,925 13,794 9,158 Net interest income, current year 166,274$ 160,349$ 146,555$

In 2012, average earning asset volume increased 4.4% and was the primary factor contributing to the increase in net interest income. The low interest rate environment since 2009 contributed to favorable interest rate variances in 2010 and 2011. The unfavorable rate variance in 2012 is a result of slightly lower spreads. Volume variances were a secondary factor in 2010 and 2011 as average earning asset growth of 2.7% in 2010 and 0.2% in 2011 was lower than the growth rate in 2012.

Provision for Loan Losses

Changes in the allowance for loan losses impact the Consolidated Statement of Comprehensive Income when the allowance is increased through a provision for loan losses or decreased through loan loss reversals. We review our loan portfolio on a regular basis to determine if any increase through provision for loan losses or decrease through a loan loss reversal in our allowance for loan losses is necessary based on our assessment of the probable losses in our loan portfolio. We recorded provisions for loan losses of $16.0 million in 2012, $23.0 million in 2011, and $23.0 million in 2010.

The 2012 provision for loan losses was primarily related to $12.4 million in net loan charge-offs during the year and a $3.6 million increase in estimated losses inherent in the portfolio at December 31, 2012. The 2011 provision for loan losses was primarily related to $17.6 million in net loan charge-offs during the year and a $5.4 million increase in estimated losses inherent in the portfolio. The 2010 provision for loan losses was primarily related to $19.8 million in net loan charge-offs during the year and a $3.2 million increase in estimated losses inherent in the portfolio.

Noninterest Income

Total noninterest income decreased $40.9 million in 2012. During 2012, we recorded noninterest income of $49.4 million, compared with $90.3 million in 2011, and $27.0 million 2010.

For the year ended December 31, Percent(in thousands) 2012 2011 Change

Patronage income 28,595$ 43,299$ (34.0%)AgBank recapitalization distribution — 34,006 —Loan and other fees 9,413 6,842 37.6%Farm Credit Insurance Fund distribution 6,232 — —Loan servicing income 4,420 4,731 (6.6%)Other noninterest income 746 1,385 (46.1%)

Total noninterest income 49,406$ 90,263$ (45.3%)


Patronage income 43,299$ 9,743$ 344.4%AgBank recapitalization distribution 34,006 — —Loan and other fees 6,842 5,922 15.5%Farm Credit Insurance Fund distribution — 5,687 —Loan servicing income 4,731 4,543 4.1%Other noninterest income 1,385 1,086 27.5%

Total noninterest income 90,263$ 26,981$ 234.5%


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Most of the increase in noninterest income in 2011 and subsequent decrease in noninterest income in 2012 was due to transactions relating to AgBank’s merger with CoBank. As part of the merger agreement and reorganization, AgBank initiated a non-recurring recapitalization distribution to its member associations in December 2011 which resulted in noninterest income to Farm Credit West of $34.0 million and an increase in our investment in AgBank (now CoBank).

AgBank also declared patronage of $13.8 million in December 2011, prior to its merger with CoBank, relating to its 2011 earnings. In addition, we received cash patronage of $23.3 million in March 2011 relating to 2010 AgBank earnings. Combined, this resulted in AgBank patronage income of $37.1 million in 2011, compared with $21.5 million in CoBank patronage in 2012, and $4.3 million AgBank patronage in 2010.

During 2012, we received a $6.2 million distribution from Farm Credit System Insurance Corporation (FCSIC) representing our allocated portion of the excess amount in the System’s Insurance Fund above the 2% secure base amount. We also received a $5.7 million FCSIC distribution in 2010, but the FCSIC made no distribution in 2011.

Noninterest Expense

The dollar amounts and year-over-year percentage changes in each noninterest expense component are reported in the following tables.


Salaries and employee benefits 26,685$ 24,304$ 9.8%Information technology services 4,894 4,686 4.4%Occupancy and equipment 2,754 2,564 7.4%Supervisory and examination 1,465 1,458 0.5%Other noninterest expense 6,579 6,497 1.3% Total operating expense 42,377 39,509 7.3%Insurance Fund premiums 2,402 3,140 (23.5%)Loss on other property owned, net 3,249 8,817 (63.2%)

Total noninterest expense 48,028$ 51,466$ (6.7%)


Salaries and employee benefits 24,304$ 22,906$ 6.1%Information technology services 4,686 4,618 1.5%Occupancy and equipment 2,564 2,478 3.5%Supervisory and examination 1,458 1,316 10.8%Other noninterest expense 6,497 6,010 8.1% Total operating expense 39,509 37,328 5.8%Insurance Fund premiums 3,140 2,739 14.6%Loss on other property owned, net 8,817 4,683 88.3%

Total noninterest expense 51,466$ 44,750$ 15.0%

Our operating and noninterest expenses have been well controlled, particularly in light of our earning asset size. The control of expense is a key component in providing “added value” to our customers. Total noninterest expense decreased $3.4 million in 2012 following a $6.7 million increase in 2011. The 2012 decrease was primarily due to lower losses on other property owned. In 2012, we recorded losses of $4.1 million to recognize lower estimated net realizable values of certain other property owned. The 2012 losses were $3.4 million less than the $7.5 million in losses recorded in 2011. In 2010, we recorded $4.4 million in losses to recognize lower other property owned values.

We measure our operating efficiency using a ratio of our operating expenses as a percentage of our average earning assets. Operating expense for this purpose includes all noninterest expense except losses on other property owned. Our operating efficiency has been very positive over the last three years as operating expense as a percent of average earning assets was 0.75%, 0.74%, and 0.70% in 2012, 2011 and 2010, respectively.

Benefit from Income Taxes

We recorded a provision for income taxes of $0.1 million in 2012 and benefits from income taxes of $0.7 million in 2011 and $0.1 million in 2010. The 2011 tax benefit is the result of deferred tax liabilities reversing, primarily relating to our portfolio of operating and true leases.

In 2010, 2011 and 2012, patronage distribution deductions offset substantially all PCA subsidiary taxable income.

Liquidity and Funding Sources

As shown in the tables on pages 13 and 14, average equity financing, as a measure of our liquidity, has increased from $668 million in 2010 to $887 million in 2012 – an increase of $219 million. While most of this increase is related to our profitability, approximately $22 million of the two-year improvement is related to increased preferred stock investments made by our customers. The preferred stock program was implemented in 2003 and has grown consistently until it reached the program maximum in early 2011. Our stockholders and FCA have approved $200 million as the maximum amount of preferred stock that can be outstanding. To allow for dividends to be added to members’ preferred stock holdings, management has chosen to limit preferred stock outstanding to $198 million. The preferred stock program enhances capital and provides a competitive return to our customer/investors.

Our policy is to maintain adequate liquidity, which enhances core earnings, minimizes the impact from future adversities, and enhances the probability that patronage dividends can continue to be paid to customers. Since the preferred stock program has reached its limit, future increases in liquidity will primarily come from continued earnings. We anticipate liquidity levels will be adequate to meet our obligations.


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Currently, our liquidity from external sources is largely dependent on obtaining funds from CoBank or other sources. CoBank’s primary source of funds is the sale of securities through the Federal Farm Credit Banks Funding Corporation. We also could enhance liquidity via the sale of loan and lease participations or securities.

Our primary source of liquidity is the ability to obtain funds for operations through our borrowing relationship with CoBank. The note payable to CoBank is collateralized by a pledge to CoBank of substantially all of our assets. Substantially all cash received is applied to the note payable and substantially all cash disbursements are drawn on the note payable. Our indebtedness to CoBank is governed by a financing agreement. That agreement is subject to periodic renewal in accordance with normal business practices. The annual average principal balances of the note payable to CoBank (and predecessor AgBank) were $4.8 billion in 2012, $4.8 billion in 2011, and $4.9 billion in 2010.

The average interest rate paid to CoBank during 2012 was 1.59% while the weighted average interest rate at December 31, 2012 was 1.41% as shown in the following table. At December 31, 2012, the note payable to CoBank consisted of the following components.

(dollars in thousands) WeightedAverage

Interest Rate Product Type Interest Rate Balance

Variable rate component 0.48% 2,928,726$ Fixed rate component 2.71% 2,108,895 Prime, LIBOR, Adjustable rate component 0.81% 13,382

Total note payable to CoBank 1.41% 5,051,003$

Variable interest rates are set administratively. Fixed rates are significantly influenced by market rates at the time a customer elects to fix their rate. LIBOR, adjustable, and prime rate-based interest rates are tied to market indices. Due to credit market disruptions in 2007 and 2008, we have limited the use of interest rate products tied to market indices.

Funds Management and Interest Rate Risk

Our asset/liability management policy calls for interest rate risk to be minimized. The interest rate risk inherent in our loan portfolio is substantially mitigated through our funding relationship with CoBank, which allows loans to be match-funded. Borrowings from CoBank match the pricing, maturity, and option characteristics of our loans to customers. CoBank manages interest rate risk through their direct note pricing and asset/liability management processes.

Although CoBank incurs and manages the primary sources of interest rate risk, we are still exposed to interest rate risk from the impact of interest rate changes on earnings generated from assets funded with our equity. To partially stabilize earnings from our liquid funds, we have funded fixed rate

leases with variable rate borrowings. This enables us to stabilize earnings without significantly increasing our overall interest rate risk position.

The interest rate products we offer include variable, fixed, and adjustable/indexed interest rate products/programs. While some of those loan products provide reasonable flexibility in the maintenance of net interest income in the face of interest rate, operating expense, and liquidity changes, certain programs involve the establishment of a fixed spread over our cost of funds. Given the long-term nature of many of our loan assets, the extent to which these fixed spreads limit net interest income makes it important that we maintain appropriate control of operating expenses and nonearning assets. We also limit the duration of fixed interest spreads. Interest rates charged are based on the following factors: the competitive rate environment; the interest rate charged by CoBank; our existing rates and spreads; and, our profitability and capital accumulation objectives.

Customer-owned interest-bearing future payment funds continue to be an important funding source for us. Year-end 2012, 2011, and 2010 balances in those accounts were $332 million, $257 million, and $141 million, respectively. The interest rate on those accounts is targeted to give customers a competitive return at a cost to us that is similar to our short term funding cost from CoBank.

Members’ Equity

Amounts of Capital

Capital supports asset growth and provides protection for unexpected credit and operating losses. Capital is also needed for investments in new products and services. A sound capital position is critical to our long-term financial success due to the volatility and cycles in agriculture.

Over the past several years, we have been able to build capital through net income (after patronage payments) and with our preferred stock program (after dividend payments thereon). Members’ equity at December 31, 2012 totaled $1.2 billion, compared with $1.1 billion at December 31, 2011, and $1.0 billion at December 31, 2010. Members’ equity includes common and preferred stock purchased by our customers and retained earnings accumulated through net income, less preferred stock dividends and patronage distributed to customers. Members’ equity also includes accumulated other comprehensive income. Our capital position is reflected in the following ratio comparisons.

December 31, 2012 2011 2010

Members’ equity as a percent of total assets 18.13% 17.74% 15.62%Ratio of debt to members’ equity 4.5 to 1 4.6 to 1 5.4 to 1


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Capital Composition

Our retained earnings increased $96 million to $1.002 billion at December 31, 2012, up from $906 million at December 31, 2011. This increase was a result of net income of $151 million, partially offset by $51 million of patronage distributions and $4 million of preferred stock dividends. Steady growth in both retained earnings and total members’ equity is shown in the following table. This growth provides increased protection for the level of member-purchased equities outstanding.

Total members’ equity as reported below is net of accrued patronage dividends and preferred stock dividends.


Unallocated retained earnings 1,002,456$ 905,955$ 766,850$ Preferred stock 198,336 198,336 180,509 Capital stock and participation certificates 3,847 3,816 3,868 Accumulated other comprehensive income 4,063 6,312 6,008

Total members' equity 1,208,702$ 1,114,419$ 957,235$

We have two sources of other comprehensive income (loss): one related to unrealized gains on investment securities – available-for-sale; and, the other related to an unrecognized net actuarial loss on a defined benefit pension plan. These items are discussed in Notes 2, 4, 9, and 12 to the financial statements.

Customer-owned Equities

Since we are a cooperative, each customer is required to make a common equity investment in our capital stock (for agricultural producers) or participation certificates (for non-producers). At December 31, 2012 (and for all periods presented), the required investment was $1 thousand per voting stockholder. Customers with multiple loans under common control satisfy their equity ownership requirement with a single $1 thousand cash investment.

Our common equity holders may voluntarily invest in our preferred stock. At December 31, 2012, preferred stock investments totaled $198 million. Purchases are limited to $4 million per customer.

Both forms of customer-owned equity investments are at-risk. Retirement of common or preferred stock is at the sole discretion of the Board, or by our president when consistent with authority delegated by the Board.

Patronage Dividend Program

We have a patronage dividend program that allows us to distribute a portion of our net earnings to our shareholders. This program provides for the allocation of net earnings in the manner described in our Bylaws. When determining the amount and method of patronage to be distributed, the Board considers the setting aside of funds to increase retained earnings in order to (1) meet capital adequacy standards established by Farm Credit regulations, (2) meet our internal capital adequacy standards to support competitive pricing at targeted earnings levels, and (3) maintain reasonable reserves. Patronage distributions are based on business done with us during the year. The Board declared patronage distributions of $51 million in 2012, $33 million in 2011, and $32 million in 2010; these cash payments are made shortly after the end of the year for which the dividends are declared.

The Board also approves the allocation of the remainder of our net income available for distribution in the form of nonqualified written notices of allocation. This amount has been added to Farm Credit West’s unallocated retained earnings account. The Board considers these earnings to be permanently invested in Farm Credit West and there is no plan to revolve or redeem these amounts. Typically, we have an immaterial amount of non-patronage sourced operations, which produce an immaterial amount of net income (or loss). However, in 2011, we also recorded $34.0 million in non-recurring AgBank recapitalization income as non-patronage sourced income. The 2011 recapitalization distribution was related to AgBank retained earnings from years prior to 2007.

Capital Adequacy

Each year, our Board establishes a formal capital adequacy plan that addresses capital targets in relation to risks. Capital adequacy plans assess the capital level necessary for financial viability and to provide for growth. Our plan is updated annually and approved by our Board. The capital adequacy plan identifies key risk components and estimates capital levels to compensate for those risks. The plan encompasses credit risk, loan concentrations, participated loans, allowance for loan losses levels, loan growth, and other key risk factors.

Farm Credit regulations establish minimum capital standards expressed as a ratio of capital to assets, taking into account relative risk factors for all System institutions. In general, the regulations provide for a relative risk weighting of assets and establish a minimum ratio of permanent capital, total surplus and core surplus to risk-adjusted assets. If regulatory minimums are not met, regulatory action may be taken (potentially including a prohibition from retiring equities and making certain distributions to equity holders).


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As shown in the following table, Farm Credit West substantially exceeded each regulatory minimum capital requirement for the quarters ended December 31, 2012, 2011, and 2010. Further, the fourth quarter 2012 capital ratios are in excess of the 12% target capital levels established by the Board in their 2012 Capital Adequacy Plan.

Type of capital as % of Regulatory risk-adjusted assets 2012 2011 2010 Minimum

Permanent capital 16.99% 16.12% 14.27% 7.00%Total surplus 13.70% 12.62% 11.02% 7.00%Core surplus 13.56% 12.47% 10.98% 3.50%

For the quarter ended December 31,

In 2011 and 2012, all three capital ratios increased due to additions to capital through net earnings and a slower rate of growth in risk-adjusted assets.

As reflected in the Capital Composition section of this report, members’ equity is primarily composed of retained earnings. Similarly, retained earnings is the primary component of each of the three types of capital used to determine the regulatory capital ratios above. Preferred stock is the key component that makes permanent capital higher than total and core surplus. The costs associated with the preferred stock program are appropriate given the corporate objectives facilitated by the program.

Economic Capital

Risk is an inherent part of our business activities. The Association’s capital management framework is intended to ensure there is sufficient capital to support the underlying risks of its business activities, exceed all regulatory capital requirements, and achieve certain capital adequacy objectives. Farm Credit West uses economic capital software, methodologies, and assumptions to quantify the capital requirements related to primary areas of risk. We periodically quantify our economic capital requirements, based on the credit risk, interest rate risk, operational risk, and market risk inherent in our operations. Due to the evolving nature of economic capital, it is anticipated that we will continue to refine our methodologies and assumptions. Any refinement of these methodologies and assumptions could result in a material change to economic capital.

Economic capital is a measure of risk and is defined as the amount of capital required to absorb potential unexpected losses resulting from extremely severe events over a one-year period. Our economic capital analyses indicate we have total capital equivalent to the amount of economic capital required to meet a “AA” solvency standard, which equates to a default only three times in 10,000 situational simulations. This means the likelihood of incurring losses in excess of the required economic capital amount is estimated to be similar to the likelihood of a “AA” rated bond defaulting (0.03% probability).

Young, Beginning, and Small Farmer and Rancher Program

Definitions

We have specific young, beginning, and small farmer and rancher programs to provide the credit and related needs of young, beginning, and small (YBS) customers and potential customers in our chartered territory. The definitions of YBS farmers and ranchers follow.

Young: A farmer, rancher, or producer or harvester of aquatic products who was age 35 or younger as of the date the loan was originally made.

Beginning: A farmer, rancher, or producer or harvester of aquatic products who had 10 years or less farming or ranching experience as of the date the loan was originally made.

Small: A farmer, rancher, or producer or harvester of aquatic products who normally generated less than $250 thousand in annual gross sales of agricultural or aquatic products at the date the loan was originally made. (We establish our quantitative objectives and measure our results using only the number of operations with sales in excess of $10 thousand.)

Our YBS Mission Statement

We will encourage the financing of young, beginning and small farmers, ranchers and producers or harvesters of aquatic products by implementing a program designed to meet the needs of these applicants to the fullest extent of their creditworthiness. The Association will support government efforts to provide beginning farmer assistance through special programs.


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Demographics

The following table outlines the percentage of each type of YBS operation in the market as a whole (the “Percent of Market” column) and the percentage of our portfolio that is made up of each type of YBS loan (the “Farm Credit West Percent” column) at December 31, 2012. For example, using the 2007 U.S. Department of Agriculture (USDA) Census there were 12,885 farms with sales of greater than $10 thousand in our territory; 6% of those operations are classified as “Young,” while at December 31, 2012, 14% of our customers were “Young.”

Total Number Percent of Farm Creditin Market Market West Percent

Farms with sales > $10,000 12,885

Young Farmer 6% 14% Beginning Farmer 63% 23% Small Farmer 69% 22%

The 2007 USDA Agricultural Census is the latest demographic information available.

Young Farmer Loans: The table shows that 14% of our total loan and lease customer base is in the young category – well in excess of the “Percent of Market” of 6% of farms with sales in excess of $10 thousand.

Beginning Farmer Loans: The table shows 23% of our customer base is in the beginning category, compared with the “Percent of Market” of 63% of farms with sales in excess of $10 thousand.

Small Farmer Loans: The table shows 22% of our customer base is in the small category, compared with the “Percent of Market” of 69% of farms with sales in excess of $10 thousand.

YBS Qualitative Goals

We establish annual marketing goals with the objective of increasing our market share of loans to YBS farmers and ranchers. Our goals emphasize:

Promoting related services, either directly or in coordination with others, that are responsive to the needs of YBS farmers and ranchers in our territory;

Coordinating credit and services offered with other System institutions as well as with governmental and private sources of credit who offer credit and services to YBS farmers and ranchers in our territory; and,

Implementing effective outreach programs to attract YBS farmers and ranchers.

YBS Outreach Programs

Our YBS outreach programs include the following.

Young Farmer and Rancher Executive Institute: We began the Young Farmer and Rancher Executive Institute to provide a combination of real-life scenarios and sound professionally-developed theory to generations transitioning from farm employees to management. This program is partnered with professors from California Polytechnic State University, San Luis Obispo (Cal Poly) who designed a hands-on curriculum to meet the needs of our YBS customers.

Internships: We provide about six to ten college students each year a paid internship (in addition to college units). They get the opportunity to gain practical experience and explore careers in agriculture. The ten-week program provides the interning students hands-on experience in ag-finance and real estate appraisal.

College Scholarships: Each school year, we award a number of college scholarships to students with majors directly related to agriculture. Currently we are providing $1 thousand per year to about 40 scholars.

Loan Contest: We sponsor a loan contest in conjunction with Cal Poly, which provides an opportunity for students to experience reality-based loan scenarios and make recommendations based upon their credit analysis. Teams of two or three students are given a few weeks to complete written credit analyses. The top five groups present their recommendations and loan conditions to a panel of our staff members, who grade the teams on presentation skills and credit understanding.

High School Ag-Finance Contest: We provide local FFA chapters and area high school agriculture departments an opportunity to excel in ag-finance. Working with their local high school instructors, local participants are given two months to expand their knowledge of ag-finance and the Farm Credit System. The top three individuals from each participating high school are selected to compete in our “Ag Finance Quiz.” We not only facilitate the activities, we provide prize money to the ag department of the team which scores highest on the written quiz.

Agribusiness Chair at Cal Poly: This outreach is to develop farmer/agribusiness-related seminars that will be available to our customers. The program also funds a professorship and three new advanced finance and appraisal classes.

Multicultural Scholars in Agriculture at Fresno State: During 2012, FCW coordinated with American AgCredit, Fresno-Madera Farm Credit and CoBank and contributed $90,000 to Fresno State University. This contribution will be used to establish an endowment in our names to support Multicultural Scholars in Agriculture. Future contributions to this endowment fund may be made by each of the participating organizations.


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YBS Quantitative Programs

We have developed quantitative targets to guide our progress in serving YBS customers. Our goals are expressed as a percentage of the total number of YBS loans of each type in our territory. For example, below, our goal for December 31, 2012 was to be serving 13% of the estimated 8,843 “Small” operations in our territory; we met that goal for 2012. Goals for the small farmer area are based on number of farmers and ranchers with gross farm income over $10 thousand.

Young Beginning SmallFarmer Farmer Farmer

Number of YBS Loans in Market 758 8,145 8,843

Farm Credit West YBS ResultsDecember 31, 2012 N/A 23% 13%

Farm Credit West YBS GoalsDecember 31, 2012 N/A 23% 13%December 31, 2013 N/A 23% 14%December 31, 2014 N/A 24% 15%December 31, 2015 N/A 25% 16%

Management provides quarterly reports to our Board detailing the number, volume, and credit quality of our YBS customers. (For 2012, our young farmer results are not meaningful due to an anomaly in the census data. While the 2007 census data reports 758 young farmers in our territory, our YBS results show more than 758 young farmers as Farm Credit West customers.)

YBS Program Safety and Soundness

We established a small loan function in 2003 to better serve YBS customers. Service to those customers through that function has expanded each year. Procedures have been established to streamline the delivery of small loans utilizing credit scoring. Loans will continue to be made on a sound basis, with proper emphasis on the fundamentals of sound credit. Loans made under this program meet all our requirements for eligibility and scope of financing, interest rates, and length of term. Co-makers and guarantors (financially responsible family members or other individuals) and secondary collateral are utilized when available and appropriate to minimize risk. Excessively ambitious growth plans are restricted.

Forward-Looking Information

This discussion contains forward-looking statements. These statements are not guarantees of future performance; future operations involve certain risks, uncertainties, and assumptions that are difficult to predict. Words such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” or “will” are intended to identify forward-looking statements. These statements are based on management’s assumptions and analyses made in light of experience and other historical trends, current conditions, and expected future developments. However, actual results and developments may differ materially from our expectations and predictions due to a number of risks and uncertainties, many of which are beyond our control. Readers are cautioned not to place undue reliance on these forward-looking statements. We will not update any forward-looking statements to reflect events or circumstances arising after they are made.

Critical Accounting Policies and Estimates

Our financial statements are based on accounting principles generally accepted in the United States of America. Our significant accounting policies are critical to the understanding of our results of operations and financial position because some accounting policies require us to make complex or subjective judgments and estimates that may affect the value of certain assets or liabilities. These policies are considered critical because we have to make judgments about matters that are inherently uncertain. For a complete discussion of significant accounting policies see Note 2 to the financial statements.

Customer Privacy

Customer financial privacy and the security of other non-public information are important to Farm Credit West. Therefore, we hold customer financial and other non-public information in strictest confidence. Federal regulations allow Farm Credit West to disclose customer information to others only in certain situations. Examples of these situations include legal or law enforcement proceedings; when such information is requested by another Farm Credit System or other financial institution with which customers do business or; consumer reporting agencies.

Report of Management

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Farm Credit West’s financial statements are prepared by management, who are responsible for their integrity and objectivity, including amounts that must necessarily be based on judgments and estimates. In the opinion of management, the accompanying financial statements fairly present Farm Credit West’s financial condition and results of operations, in conformity with generally accepted accounting principles appropriate in the circumstances. Other financial information included in this 2012 Annual Report is consistent with that in the financial statements.

To meet its responsibility for reliable financial information, management depends on Farm Credit West’s accounting and internal control systems, which have been designed to provide reasonable, but not absolute, assurance that assets are safeguarded and transactions are properly authorized and recorded. These systems have been designed to recognize that the cost must be related to the benefits derived. To monitor compliance, Farm Credit West’s internal auditors and review staff perform audits of the accounting records, review accounting systems and internal controls, and recommend improvements as needed. The financial statements are audited by PricewaterhouseCoopers LLP, independent auditors, who consider internal controls in connection with the audit of Farm Credit West’s financial statements in accordance with auditing standards generally accepted in the United States of America. Farm Credit West is also examined by the Farm Credit System’s regulator, the Farm Credit Administration (FCA).

Farm Credit West has adopted a standard of conduct policy that applies to each director and employee. Annually, the Board of Directors (Board) and senior management review potential exceptions to that policy. Actions are taken to eliminate or control situations determined to be exceptions. The Board has established a complaint procedure for accounting, financial reporting, internal control, and auditing matters which allows confidential and anonymous submission of concerns.

Farm Credit West’s principal executives and chief financial officer are responsible for establishing and maintaining adequate internal control over financial reporting. For the purposes of this report, “internal control over financial reporting” is defined as a process designed by, or under the supervision of Farm Credit West’s principal executives and chief financial officer, and effected by the Board, managers, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting information and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Management has completed an assessment of the effectiveness of Farm Credit West’s internal control over financial reporting as of December 31, 2012. Based on the assessment performed, management concluded that as of December 31, 2012, the Association’s internal control over financial reporting was effective. Additionally, based on this assessment, Farm Credit West determined that there were no material weaknesses in internal control over financial reporting as of December 31, 2012. No significant changes have occurred in Farm Credit West’s internal control processes or procedures over financial reporting that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

The Board is composed of directors who are not employees and who have met independence criteria established in the Farm Credit West Board of Directors’ Charter. The Board has established an Audit Committee which has oversight responsibilities for Farm Credit West’s system of internal controls and financial reporting; this Annual Report has been prepared under the oversight of the Audit Committee. The Audit Committee consults regularly with management and meets periodically with the independent auditors and internal auditors to review the scope and results of their work. The independent auditors and internal auditors have direct access to the Audit Committee.

The undersigned certify that this 2012 Annual Report has been prepared in accordance with all applicable statutory or regulatory requirements, that the information contained herein is true, accurate, and complete to the best of our knowledge and belief, and that we have reviewed this report.

Edgar A. Terry Chairman of the Board of Directors

Mark D. Littlefield President and Chief Executive Officer

Christopher J. Doherty Executive Vice President –

Fiscal Operations Chief Financial Officer

March 7, 2013

Report of the Audit Committee

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The Disclosure Information section of this Annual Report describes the Audit Committee’s policy/charter guidance, its composition and current membership, and its primary functions. The Committee’s responsibilities are described more fully in Farm Credit West’s Internal Audit Policy and Audit Committee Charter.

During 2012, the Farm Credit West Audit Committee (the Committee) met seven times to fulfill its responsibilities. The Committee’s responsibilities include monitoring and overseeing the financial reporting process. In this context, the Committee reviewed, discussed, and approved in accordance with its charter the following:

Farm Credit West’s Quarterly Financial Reports to Shareholders for 2012 as well as the Annual Report to Shareholders for the year ended December 31, 2011.

Management’s quarterly certifications regarding Farm Credit West’s internal controls as well as internal control testing results, consistent with the Sarbanes-Oxley Act as implemented by the Farm Credit System.

The results of the 2011 annual financial audit by PricewaterhouseCoopers LLP, Farm Credit West’s independent auditors.

Discussions with PricewaterhouseCoopers to confirm their independence from Farm Credit West. The engagement of PricewaterhouseCoopers to perform the 2012 annual financial audit and to issue a report thereon as well as discussions of the scope of the financial audit, which was in accordance with generally accepted auditing standards.

Discussions with PricewaterhouseCoopers of matters as required by Statement on Auditing Standards No. 114 (“The Auditor’s Communication with Those Charged with Governance”). Both PricewaterhouseCoopers and Farm Credit West’s Director of Internal Audit provide reports directly to the Committee on significant matters.

The results of the 2012 Internal Fiscal and Operations Audit, Internal Credit Review and Internal Information Technology Review; the results of staff “exit” interviews as directed by the Committee and the Association’s internal controls.

Based on the foregoing review and discussions and relying thereon, the Committee recommended that the Board of Directors include the Audited Financial Statements in the Association’s Annual Report to Shareholders for the year ended December 31, 2012.

Barry T. Powell

Chairman of the Audit Committee

March 7, 2013

Audit Committee Members

Richard J. Enns, Vice Chairman Adam B. Firestone Thomas R. Heenan Douglas C. Filipponi Robert N. Hansen Sureena B. Thiara

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Independent Auditor's Report To the Board of Directors & Shareholders of Farm Credit West, ACA and Subsidiaries: We have audited the accompanying consolidated financial statements of Farm Credit West, ACA and its subsidiaries, which comprise the consolidated balance sheet as of December 31, 2012, 2011, and 2010, and the related consolidated statement of comprehensive income, changes in members’ equity, 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 with 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 material 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 audits in 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 misstatement. 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 of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of 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 sufficient and 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 financial position of Farm Credit West, 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.

March 7, 2013

PricewaterhouseCoopers LLP, One Utah Center, 201 South Main Street, Suite 900, Salt Lake City, Utah 84111 T: (801) 531-9666, F: (801) 933 8106, www.pwc.com/us


Consolidated Balance Sheet


Assets

Loans and leases 6,078,186$ 5,655,766$ 5,484,059$ Less: allowance for loan and lease losses (33,200) (29,600) (24,200) Net loans and leases 6,044,986 5,626,166 5,459,859

Cash 35,878 — — Accrued interest receivable 52,146 56,561 57,233 Investment securities — available-for-sale 171,442 202,944 235,417 Investment securities — held-to-maturity 59,484 68,612 79,701 Investment in CoBank/AgBank 208,005 205,888 169,936 Other property owned 28,974 64,140 82,827 Premises and equipment, net 13,445 11,808 12,173 Other assets 54,153 46,541 32,821 Total assets 6,668,513$ 6,282,660$ 6,129,967$

Liabilities

Note payable to CoBank/AgBank 5,051,003$ 4,832,214$ 4,961,798$ Future payment funds 332,000 257,165 141,476 Accrued interest payable 6,048 7,043 8,164 Patronage distribution payable 51,000 33,000 32,000 Unfunded disbursements — 19,290 11,718 Deferred tax liabilities, net — — 753 Other liabilities 19,760 19,529 16,823

Total liabilities 5,459,811 5,168,241 5,172,732

Commitments and contingent liabilities (Note 15)

Members' Equity

Preferred stock 198,336 198,336 180,509 Capital stock and participation certificates 3,847 3,816 3,868 Unallocated retained earnings 1,002,456 905,955 766,850 Accumulated other comprehensive income 4,063 6,312 6,008

Total members' equity 1,208,702 1,114,419 957,235 Total liabilities and members' equity 6,668,513$ 6,282,660$ 6,129,967$

The accompanying notes are an integral part of these financial statements.

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Consolidated Statement of Comprehensive Income

For the year ended December 31, (in thousands) 2012 2011 2010

Interest Income

Loans and leases 235,468$ 239,187$ 242,308$ Investment securities 10,266 12,509 15,349 Total interest income 245,734 251,696 257,657

Interest Expense

Note payable to CoBank/AgBank and other 76,199 89,172 109,370 Future payment funds 3,261 2,175 1,732 Total interest expense 79,460 91,347 111,102

Net interest income 166,274 160,349 146,555

Provision for loan losses (16,046) (22,975) (23,049)

Net interest income after provision for loan losses 150,228 137,374 123,506

Noninterest Income

Patronage income 28,595 43,299 9,743 AgBank recapitalization distribution — 34,006 — Loan and other fees 9,413 6,842 5,922 Farm Credit Insurance Fund distribution 6,232 — 5,687 Loan servicing income 4,420 4,731 4,543 Other noninterest income 746 1,385 1,086 Total noninterest income 49,406 90,263 26,981

Noninterest Expense

Salaries and employee benefits 26,685 24,304 22,906 Information technology services 4,894 4,686 4,618 Occupancy and equipment 2,754 2,564 2,478 Farm Credit Insurance Fund premiums 2,402 3,140 2,739 Supervisory and examination expense 1,465 1,458 1,316 Loss on other property owned, net 3,249 8,817 4,683 Other noninterest expense 6,579 6,497 6,010 Total noninterest expense 48,028 51,466 44,750

Income before income taxes 151,606 176,171 105,737 (Provision for) benefit from income taxes (134) 678 81

Net income 151,472$ 176,849$ 105,818$

Other Comprehensive Income

Unrealized loss on investment securities — available-for-sale (1,334) (267) (722) Pension Restoration Plan adjustment (915) 571 (66)

Total comprehensive income 149,223$ 177,153$ 105,030$


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Consolidated Statement of Changes in Members' Equity

Capital AccumulatedStock and Unallocated Other Total

Preferred Participation Retained Comprehensive Members'(in thousands) Stock Certificates Earnings Income Equity

Balance at December 31, 2009 134,660$ 3,876$ 697,429$ 6,796$ 842,761$

Comprehensive income 105,818 (788) 105,030 Preferred stock issued 167,360 167,360 Preferred stock retired (125,908) (125,908) Capital stock and participation certificates issued 191 191 Capital stock and participation certificates retired (199) (199) Preferred stock dividends declared and paid 4,397 (4,397) — Cash patronage distribution declared (32,000) (32,000)

Balance at December 31, 2010 180,509 3,868 766,850 6,008 957,235

Comprehensive income 176,849 304 177,153 Preferred stock issued 99,626 99,626 Preferred stock retired (86,543) (86,543) Capital stock and participation certificates issued 201 201 Capital stock and participation certificates retired (253) (253) Preferred stock dividends declared and paid 4,744 (4,744) — Cash patronage distribution declared (33,000) (33,000)

Balance at December 31, 2011 198,336 3,816 905,955 6,312 1,114,419

Comprehensive income 151,472 (2,249) 149,223 Preferred stock issued 64,022 64,022 Preferred stock retired (67,993) (67,993) Capital stock and participation certificates issued 249 249 Capital stock and participation certificates retired (218) (218) Preferred stock dividends declared and paid 3,971 (3,971) — Cash patronage distribution declared (51,000) (51,000) Balance at December 31, 2012 198,336$ 3,847$ 1,002,456$ 4,063$ 1,208,702$


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Consolidated Statement of Cash Flows


Cash Flows from Operating Activities:

Net income 151,472$ 176,849$ 105,818$ Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 16,046 22,975 23,049 Depreciation and amortization / accretion 1,471 1,316 1,207 Loss on other property owned, net 3,197 7,917 4,418 AgBank recapitalization distribution — (34,006) — Decrease in accrued interest receivable 4,415 672 4,245 Increase in patronage receivable (10,367) (16,363) (2,047) Decrease in other assets 638 1,636 14,901 Decrease in accrued interest payable (995) (1,121) (1,131) Decrease in deferred tax liabilities — (753) (11) (Decrease) increase in other liabilities (684) 3,277 (6,887)

Net cash provided by operating activities 165,193 162,399 143,562

Cash Flows from Investing Activities:

Increase in loans and investment securities, net (396,685) (137,991) (129,194) Recoveries of loans charged off 277 211 861 Proceeds from sale of premises and equipment 183 159 141 Acquisition of premises and equipment, net (3,291) (2,049) (2,050) Proceeds from sale of other property owned 12,233 4,381 3,182 Net receipts (advances) on other property owned 1,284 5,754 (12,195)

Net cash used in investing activities (385,999) (129,535) (139,255)

Cash Flows from Financing Activities:

Net draw (repayment) on note payable to CoBank/AgBank 218,789 (129,584) (14,723) Increase (decrease) in future payment funds 74,835 115,689 (28) Net (retirements) issuances of preferred stock (3,971) 13,083 41,452 Net issuances (retirements) of capital stock and participation certificates 31 (52) (8) Cash patronage distribution paid (33,000) (32,000) (31,000)

Net cash provided by (used in) financing activities 256,684 (32,864) (4,307)

Net increase in cash 35,878 — — Cash at beginning of year — — —

Cash at end of year 35,878$ —$ —$


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Consolidated Statement of Cash Flows (continued)


Supplemental Cash Flow Information

Cash paid during the year for: Interest 80,455$ 92,468$ 112,233$ Income taxes 9 16 31

Supplemental Schedule of Noncash Investing and Financing Activities

Decrease in loans due to acquisition of other property owned 5,109$ 17,008$ 34,833$ Increase in loans due to financed sales of other property owned 23,561 17,643 5,378 Decrease in loans and allowance for loan losses from charge-offs 12,723 17,786 20,710 Other comprehensive (loss) income (2,249) 304 (788) Cash patronage distributions payable 51,000 33,000 32,000 Preferred stock dividends declared 3,971 4,744 4,397 Patronage stock received from CoBank 2,117 1,946 1,847


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Notes to Consolidated Financial Statements

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Note 1 – Organization and Operations

Organization

Farm Credit West, ACA and its subsidiaries, Farm Credit West, FLCA and Farm Credit West, PCA, (collectively, Farm Credit West or the Association) are member-owned cooperatives which provide credit and credit-related services to and for the benefit of eligible borrowers/shareholders for qualified agricultural purposes in its chartered territory. Farm Credit West’s chartered territory includes the California counties of El Dorado, Inyo, Kern, Kings, Mono, Nevada, Placer, Sacramento, San Luis Obispo, Santa Barbara, Solano, Sutter, Tulare, Ventura, Yolo, and Yuba as well as portions of Butte and Los Angeles counties. In the state of Nevada, the chartered territory includes Esmeralda county and portions of Mineral, Nye, and Clark counties.

Farm Credit West is a lending institution of the Farm Credit System (System), a nationwide system of cooperatively-owned banks and associations, which was established by Acts of Congress to meet the credit needs of American agriculture and 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 Farm Credit Banks (FCBs), CoBank, Agricultural Credit Bank (CoBank), and 82 associations. Each FCB and CoBank serves one or more Production Credit Associations (PCAs), Federal Land Credit Associations (FLCAs), and/or Agricultural Credit Associations (ACAs). PCAs, FLCAs and ACAs are collectively referred to as Associations.

Effective January 1, 2012, U.S. AgBank, FCB (AgBank) merged with and into CoBank, FCB, a wholly owned subsidiary of CoBank, ACB. As a result of the merger, CoBank became the funding bank of Farm Credit West beginning January 1, 2012.

CoBank, its related associations, and AgVantis, Inc. are collectively referred to as the District. CoBank provides the funding to associations within the District and is responsible for supervising certain activities of the District associations. AgVantis, Inc. which is owned by the entities it serves, provides technology and other operational services to certain associations and to CoBank; however, it does not serve Farm Credit West. The CoBank District consists of CoBank, 27 ACAs which each have two wholly-owned subsidiaries (a FLCA and a PCA), two FLCAs, and AgVantis, Inc.

ACA parent companies provide financing and related services to customers through their FLCA and PCA subsidiaries. Generally, FLCAs make long-term loans secured by agricultural real estate or rural homes. PCAs make short- and intermediate-term loans for agricultural production or operating purposes.

Congress has delegated authority to the Farm Credit Administration (FCA) to regulate System banks and associations. The FCA examines the activities of System

institutions to ensure their compliance with the Farm Credit Act, FCA regulations and safe and sound banking practices.

The Farm Credit Act established the Farm Credit System Insurance Corporation (Insurance Corporation) to administer the Farm Credit Insurance Fund (Insurance Fund). By law, the Insurance Fund is required to be used (1) to ensure the timely payment of principal and interest on Systemwide debt obligations (Insured Debt), (2) to ensure the retirement of protected stock at par or stated value, and (3) for other specified purposes. The Insurance Fund is also available for discretionary use by the Insurance Corporation in providing assistance to certain troubled System institutions and to cover the operating expenses of the Insurance Corporation. Each System bank is required to pay premiums, which may be passed on to the Associations, into the Insurance Fund based on its pro rata share of Insured Debt outstanding until the assets in the Insurance Fund reach the “secure base amount.” The secure base amount is defined in the Farm Credit Act as two percent of the aggregate Insured Debt or such other percentage of the Insured Debt as the Insurance Corporation, in its sole discretion, determines to be actuarially sound. When the amount in the Insurance Fund exceeds the secure base amount, the Insurance Corporation is required to reduce premiums to maintain the Insurance Fund at the two percent level. As required by the Farm Credit Act, as amended, the Insurance Corporation may return excess funds above the secure base amount to System institutions. CoBank passes this premium expense and the return of excess funds as applicable through to the Association based on the annual average adjusted balance of Farm Credit West’s direct note payable with the bank.

Operations

The Farm Credit Act sets forth the types of authorized lending activity, persons eligible to borrow from Farm Credit West, and financial services which can be provided by Farm Credit West. Farm Credit West is authorized to provide, either directly or in participation with other lenders, credit, credit commitments, and related services to eligible borrowers. Eligible borrowers include farmers, ranchers, producers or harvesters of aquatic products, their cooperatives, farm-related businesses, and certain ag product processors/marketers. Farm Credit West also offers appraisal services and credit life insurance to its borrowers as additional services.

Farm Credit West’s financial condition may be impacted by factors affecting CoBank. The CoBank Annual Report is available free of charge on CoBank’s web site, www.cobank.com. Or upon request, shareholders of Farm Credit West will be provided with a copy of the CoBank Annual Report at no charge, which includes the unaudited condensed combined balance sheet and income statement of CoBank and its affiliated associations, and AgVantis, Inc. The CoBank Annual Report discusses the material aspects of


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CoBank’s and the District’s financial condition, changes in financial condition, and results of operations.

Note 2 – Summary of Significant Accounting Policies

The accounting and reporting policies of Farm Credit West conform with accounting principles generally accepted in the United States of America (GAAP) and prevailing practices within the banking industry. The preparation of financial statements in conformity with GAAP requires Association management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates. Significant estimates are discussed in these footnotes, as applicable.

The consolidated financial statements include the accounts of Farm Credit West, ACA and its wholly-owned subsidiaries, Farm Credit West, FLCA and Farm Credit West, PCA. All significant intercompany transactions have been eliminated in consolidation.

Loans and Allowance for Loan Losses

Long-term real estate mortgage loans generally have maturities ranging from five to 40 years. Substantially all short- and intermediate-term loans for agricultural production or operating purposes have maturities of ten years or less. Loans are carried at their principal amount outstanding less unearned income. Interest on loans is accrued and credited to interest income based upon the daily principal amount outstanding.

Impaired loans are loans for which it is probable that not all principal and interest will be collected according to the contractual terms of the loan. Impaired loans include nonaccrual loans, restructured loans, and loans past due 90 days or more and still accruing interest. A loan is considered contractually past due when any principal repayment or interest payment required by the loan contract is not received on or before the due date. A loan remains contractually past due until it is formally restructured or until the entire amount past due, including principal and accrued interest, is collected in full or otherwise discharged.

Impaired loans are generally placed in nonaccrual status when principal or interest is delinquent for 90 days or more (unless adequately collateralized and in the process of collection) or when circumstances indicate that collection of principal and/or interest is in doubt. When a loan is placed in nonaccrual status, accrued interest deemed uncollectible is reversed from current year income (if accrued in the current year) and/or included in the nonaccrual balance (if accrued in prior years). Loans are charged-off at the time they are determined to be uncollectible.

A restructured loan constitutes a troubled debt restructuring if, for economic or legal reasons related to the debtor’s

financial difficulties, the Association grants a concession to the debtor that it would not otherwise consider.

When loans are in nonaccrual status, loan payments are generally applied against the recorded nonaccrual balance. A nonaccrual loan may, at times, be maintained on a cash basis. As a cash basis nonaccrual loan, the recognition of interest income from cash payments received is allowed when the collectability of the recorded investment in the loan is fully expected and when the loan does not have a remaining unrecovered charge-off associated with it. Nonaccrual loans may be returned to accrual status when principal and interest are current, the borrower has demonstrated payment performance, there are no unrecovered prior charge-offs and collection of future payments is fully expected. If previously unrecognized interest income exists at the time the loan is transferred to accrual status, cash received at the time of or subsequent to the transfer is first recorded as interest income until such time as the recorded balance equals the contractual indebtedness of the borrower.

Financial Accounting Standards Board guidance requires loan origination fees and direct loan origination costs, if material, to be capitalized and the net fee or cost to be amortized over the life of the related loan as an adjustment to yield. We have not implemented this guidance because the effects were not material to our financial position or results of operations for any year included in these consolidated financial statements.

The Association purchases loan participations from other System and non-System entities to generate additional earnings and diversify risk related to existing commodities financed and the geographic area served. Additionally, the Association sells a portion of certain large loans to other System and non-System entities to reduce risk and comply with established lending limits. Loans are sold following accounting requirements for sale treatment.

The Association uses a two-dimensional loan rating model that incorporates a 14-point risk rating scale to identify and track the probability of borrower default and a separate scale addressing loss given default over a period of time. Probability of default (PD) is the probability that a borrower will experience a default within 12 months from the date of the determination of the risk rating. A default is considered to have occurred if the lender believes the borrower will not be able to pay its obligation in full or the borrower is past due more than 90 days. The loss given default (LGD) is management’s estimate as to the anticipated economic loss on a specific loan assuming default has occurred or is expected to occur within the next 12 months.

The credit risk rating methodology (14-point risk rating scale) is a key component of the Association’s allowance for loan losses evaluation, and is incorporated into its loan underwriting standards and internal lending limit. The allowance for loan losses (allowance) is maintained at a level considered adequate by management to provide for probable


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and estimable losses inherent in the loan portfolio. The allowance is increased through provisions for loan losses and loan recoveries and is decreased through reversals of provisions for loan losses and loan charge-offs.

The level of the allowance is generally based on recent charge-off experience adjusted for relevant factors. The allowance is based on a periodic evaluation of changes in the following factors when adjusting the historical charge-off experience: loan portfolio composition, credit risk classifications, collateral values, risk concentrations, weather related conditions, and economic conditions. It is based on estimates, appraisals and evaluations of loans which, by their nature, contain elements of uncertainty and imprecision. The possibility exists that changes in the economy and its impact on borrower repayment capacity will cause these estimates, appraisals, and evaluations to change.

The allowance for loan losses includes components for loans individually evaluated for impairment and loans collectively evaluated for impairment. Generally, for loans individually evaluated, the allowance for loan losses represents the difference between the recorded investment in the loan and the fair value of the collateral, if the loan is collateral dependent. For those loans collectively evaluated for impairment, the allowance for loan losses is determined using the risk rating methodology.

Cash

Cash, as included in the consolidated financial statements, represents cash on deposit at financial institutions.

Investment Securities

Farm Credit West, as permitted under System regulations, holds investments to manage risk concentrations. Investments for which the Association has the intent and ability to hold to maturity are classified as investments held-to-maturity and are carried at amortized cost. Investments for which Farm Credit West may not necessarily intend to hold to maturity are classified and accounted for as available-for-sale. These investments are reported at fair value with net unrealized gains and losses reported as a separate component of members' equity (accumulated other comprehensive income) in the Consolidated Balance Sheet. Changes in the fair value of investments classified as available-for-sale are reflected as direct charges or credits to other comprehensive income. If an investment is deemed to be other-than-temporarily impaired, the cost basis of the investment is written down to its fair value, the credit-related loss is recognized through earnings and the non-credit related portion is recognized in other comprehensive income in the period of impairment.

Investment in CoBank/AgBank

The Association’s required investment in CoBank is in the form of Class A Stock. The minimum required investment is

4.00% of the prior year’s average direct note volume. The investment in CoBank is comprised of patronage-based stock and purchased stock.

Prior to the AgBank merger with CoBank on January 1, 2012, the Association’s investment in AgBank was in the form of Class A Stock. The minimum required investment in AgBank was 5.00% of average direct note volume, net of any excess investment. The required investment was composed of AgBank retained earnings attributed to the Association, patronage-based stock, and purchased stock.

Other Property Owned

Other property owned, consisting of real and personal property acquired through a collection action, are recorded at fair value less estimated selling costs upon acquisition. Any initial reduction in the carrying amount of a loan to the fair value of the collateral received is charged to the allowance for loan losses. Revised estimates to the fair value less cost to sell are reported as adjustments to the carrying amount of the asset, provided that such adjusted value is not in excess of the carrying amount at acquisition. Income and expenses from operations and carrying value adjustments are included in loss on other property owned, net in the Consolidated Statement of Comprehensive Income. Farm Credit West may, on occasion, finance dispositions of other property owned. These loans or sales contracts are made on the same terms as those prevailing at the time for comparable transactions.

Premises and Equipment

Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the assets. Gains and losses on dispositions are reflected in current operating results. Maintenance and repairs are charged to operating expense and improvements are capitalized.

Other Assets and Other Liabilities

Other assets are comprised primarily of patronage receivable, accounts receivable, mortgage servicing rights, and investment in Farm Credit institutions other than CoBank. Significant components of other liabilities include Insurance Fund premiums payable, benefits payable, accrued liability for the Pension Restoration Plan, and accounts payable.

Future Payment Funds

Farm Credit West is authorized under the Farm Credit Act to accept payments in advance from borrowers. Such payments are presented as liabilities in the accompanying Consolidated Balance Sheet. Future payment funds are not insured. Farm Credit West pays interest on such accounts.


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Unfunded Disbursements

By agreement with its clearing bank, Farm Credit West generally funds disbursements when checks issued by Farm Credit West are presented to the clearing bank for payment. At the 2011 and 2010 year-ends, Farm Credit West had checks outstanding that had not yet been presented to the clearing bank for payment. When such checks are subsequently presented to the clearing bank, they are typically funded by Farm Credit West through incoming cash receipts or direct note borrowings from CoBank.

Employee Benefit Plans

Substantially all Farm Credit West employees participate in the Eleventh District Defined Benefit Retirement Plan (Defined Benefit Plan) and/or the Farm Credit Foundations Defined Contribution/401(k) Plan (Defined Contribution Plan). The Defined Benefit Plan is a noncontributory plan. Benefits are based on compensation and years of service. Farm Credit West recognizes its proportional share of expense and contributes its proportional share of funding. The Defined Benefit Plan was closed to employees hired after December 31, 1997.

The Defined Contribution Plan has two components. Employees who do not participate in the Defined Benefit Plan may receive benefits through the Employer Contribution portion of the Defined Contribution Plan. In this plan, Farm Credit West provides a monthly contribution based on a defined percentage of the employee’s salary. Employees may also participate in a Salary Deferral Plan governed by Section 401(k) of the Internal Revenue Code. Farm Credit West matches a certain percentage of employee contributions. Employees hired after December 31, 1997 are eligible to participate only in the Defined Contribution Plan. All defined contribution costs are expensed in the same period that participants earn employer contributions.

Farm Credit West also participates in the Eleventh District nonqualified defined benefit Pension Restoration Plan. This plan provides retirement benefits above the Internal Revenue Code compensation limit to certain highly-compensated eligible employees. Benefits payable under this plan are partially offset by the benefits payable from the Defined Benefit Plan.

Farm Credit West provides certain health and life insurance benefits to eligible current and retired employees through the Farm Credit Foundations Retiree Medical Plan and Retiree Life Plan. The anticipated costs of these benefits are accrued during the period of the employee’s active service.

Income Taxes

As previously described, Farm Credit West, ACA conducts its business activities through two wholly-owned subsidiaries. Long-term mortgage lending activities are conducted through a wholly-owned FLCA subsidiary which is exempt from

federal and state income tax. Short- and intermediate-term lending activities are conducted through a wholly-owned PCA subsidiary. As with the PCA subsidiary, the ACA holding company is subject to income tax. Farm Credit West accounts for income taxes under the liability method. Accordingly, deferred taxes are recognized for estimated taxes ultimately payable or recoverable based on federal, state, or local laws. In return for a management fee, Farm Credit West, FLCA provides a variety of services to Farm Credit West, ACA and Farm Credit West, PCA under a management agreement. The management agreement, in effect, allocates operating expenses to each subsidiary based on estimated relative service.

Farm Credit West operates as a cooperative that qualifies for tax treatment under Subchapter T of the Internal Revenue Code. Accordingly, under specified conditions, Farm Credit West can exclude from taxable income amounts distributed as qualified patronage dividends in the form of cash, stock, or allocated retained earnings. Provisions for income taxes are made only on those taxable earnings that will not be distributed as qualified patronage dividends. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts reflected in the financial statements and tax bases of assets and liabilities. A valuation allowance is provided against deferred tax assets to the extent that it is more likely than not (over 50% probability), based on management's estimate, that the deferred tax assets will not be realized. The consideration of valuation allowances involves various estimates and assumptions as to future taxable earnings, including the effects of the Association’s expected patronage program, which reduces taxable earnings.

Deferred income taxes have not been provided on $53.4 million of patronage stock distributions received by Farm Credit West from AgBank prior to 2007. Such patronage allocations, distributed in the form of stock, are subject to tax only upon conversion to cash. Management’s intent is to permanently invest these and other undistributed earnings in CoBank (AgBank’s successor), or if converted to cash, to pass through any such earnings to Association borrowers through qualified patronage allocations.

On December 31, 2011, AgBank, in anticipation of its January 1, 2012 merger with CoBank, recapitalized and distributed stock to its Association members. Deferred taxes have not been provided on $34.0 million received by Farm Credit West on that stock distribution. Management’s intent, if that stock is ever converted to cash, is to pass through any related earnings to Association borrowers through qualified patronage allocations.

Additionally, deferred income taxes have not been provided on CoBank’s unallocated earnings.

For California tax purposes, Farm Credit West can exclude from taxable income all patronage-sourced income.


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Therefore, the provision for state income taxes is made only on non-patronage sourced earnings.

Patronage Distribution from CoBank

Effective January 1, 2012, patronage distributions from CoBank are accrued by the Association. Prior to the bank merger, the Association historically recorded patronage distributions from AgBank upon receipt of the distribution. Effective December 31, 2011, the Association accrued the AgBank patronage from its 2011 earnings. This resulted in the Association recording two years of patronage income from AgBank in 2011. The accrued 2011 patronage was paid by CoBank to the Association in March 2012.

Other Comprehensive Income (Loss)

Other comprehensive income/(loss) refers to revenue, expenses, gains, and losses that under generally accepted accounting principles are recorded as an element of members’ equity and comprehensive income but are excluded from net income. Farm Credit West records other comprehensive income/(loss) based on: (1) the market value of its investment securities available-for-sale; and, (2) the liability associated with the Pension Restoration Plan (described in Note 12).

Fair Value Measurement

Financial Accounting Standards Board (FASB) guidance defines fair value, establishes a framework for measuring fair value, and specifies disclosures about fair value measurements. It describes three levels of inputs that may be used to measure fair value.

Level 1: Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2: Observable inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly 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 in markets that are not active so that they are traded less frequently than exchange-traded instruments, the prices are not current or principal market information is not released publicly; (c) inputs other than quoted prices that are observable such as interest rates and yield curves, prepayment speeds, credit risks and default rates and (d) inputs derived principally from or corroborated by observable market data by correlation or other means.

Level 3: Unobservable inputs are those that are supported by little or no market activity and that are significant to the determination of fair value of the assets or liabilities. These unobservable inputs reflect the reporting entity’s own assumptions about factors that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For Farm Credit West, Level 3 assets include investment securities – available-for-sale, certain impaired loans, and other property owned.

Fair value disclosures are presented in Note 16.

Recently Issued or Adopted Accounting Pronouncements

In December 2011, the FASB issued guidance entitled, “Balance Sheet – Disclosures about Offsetting Assets and Liabilities.” The guidance requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This includes the effect or potential effect of rights of setoff associated with an entity’s recognized assets and recognized liabilities. This guidance is to be applied retrospectively for all comparative periods and is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this guidance will not impact the Association’s financial condition or its results of operations, but may result in additional disclosures.

In June and December 2011, the FASB issued guidance entitled, “Comprehensive Income – Presentation of Comprehensive Income.” This guidance is intended to increase the prominence of other comprehensive income in financial statements. This guidance did not change the items that must be reported in other comprehensive income. The December 2011 guidance deferred the effective date for the presentation of reclassification adjustments. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The adoption of this guidance did not impact financial condition or results of operations, but did result in changes to the presentation of comprehensive income.


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Note 3 – Loans and Allowance for Loan Losses

A summary of loan principal outstanding follows.


Real estate mortgage loans 3,528,070$ 3,258,268$ 3,132,661$ Production and intermediate-term loans 1,364,489 1,403,461 1,483,973 Agribusiness loans: Processing and marketing 626,290 602,945 555,456 Farm related businesses 262,841 213,699 206,577 Loans to cooperatives 82,083 64,270 34,278 Direct financing leases 119,323 94,593 71,114 Communication loans 71,818 16,578 — Energy loans 23,272 1,952 —

Total loans 6,078,186$ 5,655,766$ 5,484,059$

Farm Credit West’s leasing operations consist principally of the leasing of various types of agricultural equipment. Most Farm Credit West leases are classified as direct financing leases, the financial components of which are detailed in the following table. Farm Credit West’s leases typically expire during the next five years.

The following table summarizes the components of the net investment in direct financing leases included as a component of loans in the Consolidated Balance Sheet.


Minimum lease payments receivable 244,674$ 225,473$ 222,291$ Unearned income (24,540) (24,551) (26,533) Estimated residual values 20,656 19,242 20,124 Participation interest sold (121,467) (125,571) (144,768)

Direct financing leases 119,323$ 94,593$ 71,114$

In December 2012, Farm Credit West sold participation interests in certain direct financing leases totaling $46.8 million to CoBank’s Farm Credit Leasing Corporation (FCL). No gain or loss was recognized in the financial statements upon completion of this sale. Farm Credit West also sold participation interests in certain direct financing leases totaling $35.8 million in December 2011 and $38.4 million in December 2010 to FCL. No gain or loss was recognized in the financial statements upon completion of those sales.

Operating lease assets are a component of other assets on the Consolidated Balance Sheet. Net operating lease assets were $4.7 million at December 31, 2012, $4.5 million at December 31, 2011, and $4.9 million at December 31, 2010.

Farm Credit West's concentration of credit risk in various agricultural commodities is shown in the following table.


Dairy 1,147,509$ 1,090,531$ 1,113,764$ Edible tree nuts 874,744 756,526 705,180 Processing and marketing 626,290 602,945 555,456 Vegetables 437,169 421,204 412,783 Field/feed crops 387,022 383,406 404,034 Wine grapes 339,498 329,336 334,555 Livestock 300,953 299,849 286,055 Wine 271,195 247,604 249,145 Farm related business 262,841 213,698 206,577 Flowers/nursery 218,520 218,757 205,825 Tree fruit 196,461 180,109 167,168 Table grapes 189,067 187,767 180,242 Citrus 175,976 158,890 155,671 Rice 155,238 136,891 124,004 Direct financing leases 119,323 94,593 71,114 Cotton 107,165 100,080 97,106 Avocados 95,699 90,303 96,967 Prunes 89,655 90,272 71,791 Forest products 83,861 53,005 46,622

Total 6,078,186$ 5,655,766$ 5,484,059$

While the amounts shown in the previous table represent the maximum amounts of the Association’s potential credit risk as it relates to recorded loan principal, a substantial portion of the Association’s loans are collateralized. Accordingly, the Association’s exposure to credit loss associated with lending activities is considerably less than the recorded loan balances. An estimate of Farm Credit West’s credit risk exposure is considered in the determination of the allowance.

The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but typically includes farmland and income-producing property, such as crops and livestock, as well as receivables. Long-term real estate loans are secured by first liens on the underlying real property. System regulations state that long-term real estate loans are not to exceed 85% (97% if guaranteed by a government agency) of the property's appraised value. However, a decline in a property's market value subsequent to loan origination or advances, or other actions necessary to protect Farm Credit West’s financial interest in the collateral, may result in loan to value ratios in excess of the regulatory maximum.


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Farm Credit West purchases and sells loan participations with other parties in order to diversify risk, manage loan volume and comply with FCA regulations. The following tables present information regarding participations purchased and sold. Participations purchased volume includes loan syndications.

December 31, 2012 Farm Credit Non-Farm Credit(in thousands) Institutions Institutions Total

Agribusiness loans 296,622$ 94,341$ 390,963$ Real estate mortgage loans 190,617 5,686 196,303 Communication loans 71,818 — 71,818 Energy loans 23,272 — 23,272

Total participations purchased 582,329$ 100,027$ 682,356$

Participations Purchased

December 31, 2012 Farm Credit Non-Farm Credit(in thousands) Institutions Institutions Total

Real estate mortgage loans (561,258)$ (360)$ (561,618)$ Production and intermediate-term loans (266,047) — (266,047)Direct financing leases (121,467) — (121,467)Agribusiness loans (112,051) — (112,051)

Total participations sold (1,060,823)$ (360)$ (1,061,183)$

Participations Sold

Farm Credit West classifies loans according to the FCA Uniform Classification System (UCS). Following are definitions of the five UCS classifications.

Acceptable – Assets are expected to be fully collectible and represent the highest quality.

Other Assets Especially Mentioned – Assets are currently collectible but exhibit some potential weakness.

Substandard – Assets exhibit some serious weakness in repayment capacity, equity, and/or collateral pledged on the loan.

Doubtful – Assets exhibit similar weaknesses to substandard assets. However, doubtful assets have additional weaknesses in existing facts, conditions and values that make collection in full highly questionable.

Loss – Assets are considered uncollectible.

The following table shows loans and related accrued interest classified under the FCA Uniform Classification System as a percentage of total loans and related accrued interest by loan type.

December 31, 2012 2011 2010

Real estate mortgage loans Acceptable 93.6% 92.3% 91.3% OAEM 1.5% 3.0% 3.8% Substandard 4.9% 4.7% 4.9% Doubtful 0.0% 0.0% 0.0% Total 100.0% 100.0% 100.0%

Production and intermediate-term loans Acceptable 88.8% 85.8% 86.6% OAEM 3.3% 4.5% 5.4% Substandard 7.3% 9.7% 8.0% Doubtful 0.6% 0.0% 0.0% Total 100.0% 100.0% 100.0%

Agribusiness loans Acceptable 92.8% 93.0% 92.9% OAEM 3.2% 2.4% 4.4% Substandard 4.0% 4.6% 2.7% Doubtful 0.0% 0.0% 0.0% Total 100.0% 100.0% 100.0%

Communication loans Acceptable 100.0% 100.0% — OAEM 0.0% 0.0% — Substandard 0.0% 0.0% — Doubtful 0.0% 0.0% — Total 100.0% 100.0% —

Energy loans Acceptable 100.0% 100.0% — OAEM 0.0% 0.0% — Substandard 0.0% 0.0% — Doubtful 0.0% 0.0% — Total 100.0% 100.0% —

Direct financing leases Acceptable 98.6% 98.7% 97.8% OAEM 0.8% 0.1% 1.0% Substandard 0.6% 1.2% 1.2% Doubtful 0.0% 0.0% 0.0% Total 100.0% 100.0% 100.0%

Total loans Acceptable 92.6% 90.9% 90.4% OAEM 2.1% 3.2% 4.2% Substandard 5.1% 5.9% 5.4% Doubtful 0.2% 0.0% 0.0% Total 100.0% 100.0% 100.0%

There were no loans classified as loss at any of the dates presented above.


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To mitigate the risk of loan losses, Farm Credit West has obtained credit enhancements by entering into Long-Term Standby Commitment to Purchase agreements with the Federal Agricultural Mortgage Corporation (Farmer Mac). Under the agreements, which are effectively credit guarantees that will remain in place until the loans are paid in full, Farmer Mac agrees to purchase loans from Farm Credit West in the event of default (typically when a guaranteed loan becomes four months past due), subject to certain conditions. In return, the Association pays Farmer Mac commitment fees based on the outstanding balance of loans covered by the Agreements. The principal balance of the loans under the Long-Term Standby Commitment was $95.4 million at December 31, 2012, $98.3 million at December 31, 2011, and $99.5 million at December 31, 2010. Fees paid to Farmer Mac for such commitments totaled $0.3 million during 2012, $0.3 million during 2011, and $0.3 million during 2010. Those Farmer Mac fees were classified as reductions in interest income. Other fees paid to Farmer Mac related to securitized loans are noted elsewhere in this report.

In addition to Farmer Mac, credit enhancements with federal government agencies of $15.6 million at year-end 2012, $16.1 million at year-end 2011 and $16.4 million at year-end 2010 were also outstanding.

Impaired loans are loans for which it is probable that not all principal and interest will be collected according to the contractual terms. The following table presents information concerning impaired loans including accrued interest, if any.


Impaired nonaccrual loans: Current as to principal and interest 58,909$ 93,447$ 64,471$ Past due 68,285 29,908 43,467 Total nonaccrual loans 127,194 123,355 107,938 Impaired accrual loans: Accrual restructured 5,966 — — Accrual loans 90 days or more past due 884 6,470 3,443 Total impaired accrual loans 6,850 6,470 3,443

Total impaired loans 134,044$ 129,825$ 111,381$

At December 31, 2012, there were approximately $14.5 million in commitments to lend additional funds to debtors whose loans were classified as impaired. Such commitments have been considered when establishing the overall allowance.

Impaired assets consist of impaired loans and other property owned. The following table shows impaired assets and includes a detail of impaired loans by loan type.


Nonaccrual loans Real estate mortgage 68,273$ 35,590$ 55,805$ Production and intermediate-term 51,251 76,503 44,633 Agribusiness 7,526 10,877 7,183 Direct financing leases 144 385 317 Total nonaccrual loans 127,194 123,355 107,938

Accrual restructured loans Real estate mortgage 2,055 — — Production and intermediate-term 3,911 — — Total accruing restructured loans 5,966 — —

Accrual loans 90 days or more past due Real estate mortgage — 3,954 3,443 Production and intermediate-term 884 1,032 — Agribusiness — 1,483 — Direct financing leases — 1 — Total accrual loans 90 days or more past due 884 6,470 3,443

Total impaired loans 134,044 129,825 111,381

Other property owned 28,974 64,140 82,827

Total impaired assets 163,018$ 193,965$ 194,208$

Additional impaired loan information is shown in the following six tables. Impaired loans which carried no related specific allowance for loan loss were considered in the determination of the overall allowance.

Impaired ImpairedDecember 31, 2012 with related with no related Total(in thousands) allowance allowance Impaired

Production and intermediate-term loans 39,561$ 16,485$ 56,046$

Real estate mortgage loans 4,152 66,176 70,328 Agribusiness loans Farm related businesses 2,354 1,563 3,917 Processing and marketing 1,909 1,700 3,609

Direct financing leases 119 25 144

Total 48,095$ 85,949$ 134,044$

Recorded Investment in Impaired Loans


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Impaired ImpairedDecember 31, 2011 with related with no related Total(in thousands) allowance allowance Impaired

Production and intermediate-term loans 60,466$ 17,069$ 77,535$ Real estate mortgage loans 239 39,305 39,544 Agribusiness loans Farm related businesses 2,538 5,398 7,936 Processing and marketing 1,795 2,629 4,424 Direct financing leases 209 177 386

Total 65,247$ 64,578$ 129,825$

Recorded Investment in Impaired Loans

December 31, (in thousands) 2012 2011

Production and intermediate-term loans 109,885$ 108,507$ Real estate mortgage loans 76,990 42,810 Agribusiness loans Farm related businesses 4,610 8,421 Processing and marketing 8,369 8,958 Direct financing leases 144 386

Total 199,998$ 169,082$

Unpaid Principal Balance of Impaired Loans


Production and intermediate-term loans 10,656$ 11,040$ Real estate mortgage loans 2,091 75 Agribusiness loans Farm related businesses 225 — Processing and marketing 858 1,065 Direct financing leases 77 89

Total 13,907$ 12,269$

Related Allowance on Impaired Loans


Production and intermediate-term loans 73,182$ 47,339$ Real estate mortgage loans 40,811 46,953 Agribusiness loans Farm related businesses 8,956 1,475 Processing and marketing 4,541 7,439 Direct financing leases 275 652

Total 127,765$ 103,858$

Average Impaired Loans


Production and intermediate-term loans 223$ 1,190$

Real estate mortgage loans 267 551 Agribusiness loans Farm related businesses 344 3 Processing and marketing 253 145

Direct financing leases 2 —

Total 1,089$ 1,889$

on Impaired LoansInterest Income Recognized

Interest income is recognized and cash payments are applied on nonaccrual impaired loans as described in Note 2. The following table presents interest income recognized on impaired loans.

For the year ended December 31,(in thousands) 2012 2011 2010

Interest income recognized on: Nonaccrual loans 880$ 1,794$ 666$ Accrual restructured loans 62 — — Accrual loans 90 days

or more past due 147 95 258 Interest income recognized on impaired loans 1,089$ 1,889$ 924$

Interest income on nonaccrual loans and accrual restructured loans that would have been recognized under the original terms of the loans follows.


Interest income which would have been recognized under original loan terms 5,228$ 4,512$ 4,904$ Less: interest income recognized (942) (1,794) (666)

Foregone interest income 4,286$ 2,718$ 4,238$


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The following tables provide an age analysis of past due loans including accrued interest as of December 31, 2012.

Principal and interest Not Past DueDecember 31, 2012 or Less Than 30 Total Total(in thousands) Days Past Due Past Due Loans

Real estate mortgage loans 3,521,165$ 41,255$ 3,562,420$ Production and intermediate-term loans 1,338,898 33,293 1,372,191 Agribusiness loans 973,311 2,506 975,817 Direct financing leases 119,306 17 119,323 Communication loans 71,843 — 71,843 Energy loans 23,289 — 23,289

Total loans 6,047,812$ 77,071$ 6,124,883$

Principal and interestDecember 31, 2012 30-89 Days 90 Days or Total(in thousands) Past Due More Past Due Past Due

Real estate mortgage loans 17,059$ 24,196$ 41,255$ Production and intermediate-term loans 17,931 15,362 33,293 Agribusiness loans 166 2,340 2,506 Direct financing leases 16 1 17 Communication loans — — — Energy loans — — —

Total loans 35,172$ 41,899$ 77,071$

A restructuring of a loan constitutes a troubled debt restructuring (TDR) if, for economic or legal reasons related to the debtor’s financial difficulties, the Association grants a concession to the debtor that it would not otherwise consider.

The following tables present additional information regarding troubled debt restructurings (whether accrual or nonaccrual).

Pre-modification Post-modificationDecember 31, 2012 Outstanding Outstanding(in thousands) Recorded Investment Recorded Investment

Troubled debt restructurings: Production and intermediate-term loans 3,831$ 3,831$ Real estate mortgage loans 2,062 2,062

Total 5,893$ 5,893$

Pre-modification Post-modification

December 31, 2011 Outstanding Outstanding(in thousands) Recorded Investment Recorded Investment

Troubled debt restructurings: Production and intermediate-term loans 10,360$ 10,360$ Real estate mortgage loans 7,645 7,645

Total 18,005$ 18,005$

There were no TDRs that occurred within the previous 12 months for which there was a subsequent payment default during 2012.

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


Production and intermediate-term loans 3,911$ —$

Real estate mortgage loans 2,055 —

Total 5,966$ —$

Accrual Restructured Loans


Production and intermediate-term loans 9,800$ 25,235$

Real estate mortgage loans 8,794 9,598

Total 18,594$ 34,833$

TDRs in Nonaccrual Status

Additional commitments to lend to borrowers whose loans have been modified in a TDR were $5.9 million at December 31, 2012 and $0.1 million at December 31, 2011.


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The following table summarizes changes in the allowance and includes detail regarding charge-off, recovery and provision activity by loan type.

(dollars in thousands) 2012 2011 2010


Provision for loan losses/ (loan loss reversal): Production and intermediate-term loans 10,145 19,027 10,299 Real estate mortgage loans 4,235 2,409 3,250 Agribusiness loans 1,175 1,076 11,010 Direct financing leases 428 394 (1,509) Communication loans 52 22 — Energy loans 11 47 (1) Total provision for loan losses 16,046 22,975 23,049 Charge-offs: Production and intermediate-term loans (10,802) (14,592) (9,142) Real estate mortgage loans (1,878) (1,747) (432) Agribusiness loans - (1,087) (10,982) Direct financing leases (43) (360) (154) Total charge-offs (12,723) (17,786) (20,710) Recoveries: Production and intermediate-term loans 191 102 811 Agribusiness loans 86 109 47 Direct financing leases — — 3 Total recoveries 277 211 861 Net charge-offs (12,446) (17,575) (19,849)


Net charge-offs to average loans 0.22% 0.32% 0.37%

A breakdown of the allowance by loan type follows.


Production and intermediate-term loans 17,884$ 18,350$ 13,813$ Real estate mortgage loans 9,082 6,725 6,063 Agribusiness loans 5,086 3,825 3,727 Direct financing leases 1,016 631 597 Communication loans 74 22 — Energy loans 58 47 —

Total allowance for loan losses 33,200$ 29,600$ 24,200$

The following tables contain summaries of the recorded investment in loans by loan type and the allowance for loan losses by loan type.

Principal and interest Collectively IndividuallyDecember 31, 2012 Evaluated for Evaluated for Total(in thousands) Impairment Impairment Loans

Real estate mortgage loans 3,494,147$ 68,273$ 3,562,420$ Production and intermediate-term loans 1,320,940 51,251 1,372,191

Agribusiness loans 968,291 7,526 975,817 Direct financing leases 119,179 144 119,323 Communication loans 71,843 — 71,843 Energy loans 23,289 — 23,289

Total 5,997,689$ 127,194$ 6,124,883$

Recorded Investment in Loans

Collectively IndividuallyDecember 31, 2012 Evaluated for Evaluated for Total(in thousands) Impairment Impairment Allowance

Real estate mortgage loans 6,991$ 2,091$ 9,082$ Production and intermediate-term loans 7,228 10,656 17,884

Agribusiness loans 4,003 1,083 5,086 Direct financing leases 939 77 1,016 Communication loans 74 — 74 Energy loans 58 — 58

Total 19,293$ 13,907$ 33,200$

Allowance for Loan Losses

Note 4 – Investment Securities

Farm Credit West’s investment securities portfolio is comprised entirely of Farmer Mac guaranteed agricultural mortgage-backed securities (AMBS). In three separate transactions during 2003 and 2006, the Association securitized a total of $1.402 billion in real estate mortgage loans into Farmer Mac mortgage-backed securities. Portions of two of these securities transactions were subsequently sold to U.S. AgBank (now CoBank). Accordingly, the remaining portions of these two AMBS portfolios are classified as available-for-sale and carried at fair value. At December 31, 2012, an unrealized gain on investment securities – available-for-sale totaling $6.1 million was recognized as a component of accumulated other comprehensive income on the accompanying Consolidated Balance Sheet. The $1.3 million decrease in that unrealized gain on investment securities – available-for-sale during 2012 is a part of other comprehensive income on the accompanying Consolidated Statement of Comprehensive Income.

Farm Credit West has not sold any of the third pool of Farmer Mac securities. The Association has the intent and ability to hold these mortgage-backed investment securities to


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maturity. Accordingly, these securities are classified as held-to-maturity and carried at amortized cost.

As noted above, in 2004, 2006, and 2007, Farm Credit West sold a total of $649 million of Farmer Mac AMBS securities to AgBank at par. In accordance with FASB guidance, the Association recognized gains totaling $8.8 million related to the value of those mortgage servicing rights and other beneficial interests retained in connection with the securities sold to AgBank. The value of the mortgage servicing rights had declined to $7.8 million at December 31, 2012. Mortgage servicing rights are included with other assets on the Consolidated Balance Sheet.

Fees paid to Farmer Mac related to securities owned by Farm Credit West reduced the Association’s investment security interest income by $0.9 million during 2012, $1.1 million during 2011, and $1.3 million during 2010. Furthermore, as a part of the accounting for ongoing sold securities transactions, Farm Credit West has paid fees to Farmer Mac related to the portfolio of securitized loans sold to AgBank (now CoBank). Those fees totaled $1.0 million in 2012, $1.2 million in 2011, and $1.4 million in 2010.

Substantially all mortgage-backed securities have contractual maturities in excess of ten years. However, expected and actual maturities for mortgage-backed securities will typically be shorter than contractual maturity due to scheduled and unscheduled payment activity affecting the loans underlying such securities. Materially shortened maturities could negatively impact the value of the mortgage servicing rights Farm Credit West has recognized on sold securities it continues to service.

The following is a summary of Farmer Mac agricultural mortgage-backed securities.

Weighted(dollars Amortized Fair Average in thousands) Cost Gains Losses Value Yield

December 31, 2012 165,298$ 6,144$ —$ 171,442$ 4.35%December 31, 2011 195,466 7,478 — 202,944 4.45%December 31, 2010 227,672 7,745 — 235,417 4.59%

Gross Unrealized

Mortgage-Backed Securities — Available-for-Sale

Weighted(dollars Amortized Fair Average in thousands) Cost Gains Losses Value Yield

December 31, 2012 59,484$ 2,190$ —$ 61,674$ 3.97%December 31, 2011 68,612 2,685 — 71,297 4.19%December 31, 2010 79,701 2,675 — 82,376 4.24%

Mortgage-Backed Securities — Held-to-Maturity

Gross Unrealized

None of Farm Credit West’s investment securities are in an unrealized loss position at December 31, 2012. Accordingly, no investment securities impairment has been recorded.

Note 5 – Investment in CoBank/AgBank

The Association is required to maintain an investment in CoBank equal to 4.00% of the prior year’s average direct note borrowings. The investment in CoBank is composed of patronage-based stock and purchased stock. Pursuant to the January 1, 2012 merger between CoBank and AgBank, at year-end 2011, AgBank undertook a recapitalization transaction in order to align all associations with CoBank’s stock investment requirement. The recapitalization involved the tax-free issuance of AgBank common stock to each association in exchange for an equal amount of attributed surplus previously allocated on a patronage basis to such association. As a result of the merger, the Association’s investment in AgBank stock was converted to CoBank stock.

Prior to the AgBank merger with CoBank, Farm Credit West was required to maintain an investment in AgBank equal to 5.00% of average direct note borrowings, net of excess investment. Farm Credit West’s investment in AgBank consisted of AgBank retained earnings attributed to Farm Credit West, patronage-based stock, and purchased stock. The investment in AgBank was adjusted quarterly to reflect changes in Farm Credit West’s borrowings.

Note 6 – Premises and Equipment

Premises and equipment consisted of the following.


Land, buildings, and improvements 13,438$ 12,000$ 11,407$ Furniture and equipment 5,674 5,238 4,670 Vehicles 2,734 2,864 2,820 Construction in progress 599 131 1,439 Premises and equipment at cost 22,445 20,233 20,336

Less: accumulated depreciation (9,000) (8,425) (8,163)

Total premises and equipment, net 13,445$ 11,808$ 12,173$

The following is a schedule by year of future minimum lease payments on noncancelable operating leases as of December 31, 2012.

For the year ended December 31,

2013 639$ 2014 551 2015 566 2016 580 2017 539

Later years 373 Total minimum future payments 3,248$

(in thousands)


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Note 7 – Other Property Owned

Net loss on other property owned as reflected in the accompanying Consolidated Statement of Comprehensive Income consisted of the following.


(Gain) loss on sale, net (912)$ 404$ 104$ Carrying value adjustments 4,109 7,513 4,376 Operating expense, net 52 900 203

Loss on other property owned, net 3,249$ 8,817$ 4,683$

Note 8 – Note Payable to CoBank/AgBank

Farm Credit West's indebtedness to CoBank primarily represents borrowings by Farm Credit West to fund its loan portfolio. This indebtedness is collateralized by a pledge to CoBank of substantially all of Farm Credit West's assets, and is governed by a general financing agreement (GFA) that at December 31, 2012 provided a $5.6 billion line of credit. The GFA is subject to renewal periodically in accordance with normal business practice and requires the Association to comply with certain covenants. Farm Credit West was in compliance with the terms and conditions of the GFA as of December 31, 2012.

As stated in Note 1, prior to the AgBank merger with CoBank on January 1, 2012, AgBank was the Association’s funding bank.

In September 2010, AgBank notified the Association of an event of default related to identified weaknesses in risk identification and credit administration. Farm Credit West submitted a corrective action plan to AgBank, which AgBank approved. In October 2011, the Association received confirmation from AgBank that the event of default had been cured and that the Association was in full compliance with all terms and conditions of the GFA. During the period from September 2010 through October 2011, there were no limitations placed on the Association’s availability of funds from AgBank.

Substantially all borrower loans were match-funded with CoBank. Payments and disbursements were made on the note payable to CoBank on the same basis the Association collects payments from and disburses on borrower loans. The interest rate may periodically be adjusted by CoBank based on the terms and conditions of the borrowing. The weighted average interest rate was 1.59% for the year-ended December 31, 2012. With the merger of AgBank and CoBank on January 1, 2012, the GFA was extended and will expire on May 31, 2013. The Association expects renewal of the GFA at that time.

Under the Farm Credit Act, Farm Credit West is obligated to borrow only from CoBank, unless CoBank gives approval to borrow elsewhere. CoBank, consistent with System regulations, has established limitations on the Association’s ability to borrow funds based on specified factors or formulas relating primarily to credit quality and financial condition. At December 31, 2012, the Association’s note payable was within the specified limitations.

Note 9 – Members’ Equity

Descriptions of Farm Credit West's capitalization requirements, capital protection mechanisms, regulatory capitalization requirements and restrictions, and equities are provided below.

Common Equity Investment Requirement – Capital Stock and Participation Certificates

In accordance with Farm Credit West’s capitalization bylaws, as a condition of borrowing, each borrower is required to make a common equity investment in capital stock (for agricultural producers) or participation certificates (for non-producers). Those capitalization bylaws allow stock requirements to range from (1) the lesser of $1 thousand or two percent of the amount of the loan to (2) 7% of the loan. The Board of Directors has the authority to change the common equity requirement as long as the change is within this range. At December 31, 2012 (and for all periods presented in the Consolidated Balance Sheet), the required investment was $1 thousand per voting stockholder. Customers with multiple loans under common control satisfy their equity ownership requirement with a single $1 thousand cash investment. Farm Credit West may require shareholders to subscribe to additional common equity to meet minimum System capital adequacy regulations.

Farm Credit West retains a first lien on the stock or participation certificates owned by borrowers. In accordance with the Farm Credit Act, such equities are unprotected and at-risk. Retirement of at-risk equities will be solely at the discretion of the Board of Directors, or by Farm Credit West’s president when consistent with authority delegated by the Board. Such retirements will generally be at the lower of par or book value. Repayment of a loan does not automatically result in retirement of the corresponding common equity investment.

Regulatory Capitalization Requirements and Restrictions

FCA capital adequacy regulations require Farm Credit West to maintain permanent capital of seven percent of average risk-adjusted assets and off-balance-sheet commitments. Failure to meet the seven percent capital requirement can initiate certain mandatory and possibly additional discretionary actions by FCA that, if undertaken, could have a direct material effect on Farm Credit West’s financial


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statements. Farm Credit West is prohibited from reducing permanent capital by retiring stock or making certain other distributions to shareholders unless the prescribed capital standard is met. FCA regulations also require that other additional minimum capital standards be maintained. These standards require all System institutions to achieve and maintain ratios of total surplus as a percentage of average risk-adjusted assets of 7% and of core surplus as a percentage of average risk-adjusted assets of 3.5%. At December 31, 2012, Farm Credit West's permanent capital, total surplus, and core surplus ratios were 16.99%, 13.70%, and 13.56%, respectively.

A System regulation empowers FCA to direct a transfer of funds or equities by one or more System institutions to another System institution under specified circumstances. This regulation has not been utilized to date. Farm Credit West has not been called upon to initiate any transfers and is not aware of any proposed action under this regulation.

Description of Equities

Preferred Stock

Farm Credit West is authorized to issue and have outstanding up to 200 million shares of class H preferred stock. Purchases may be made by individuals or entities that hold, at the time of their purchase of preferred stock, legal title to, or beneficial interest in, shares of any class of Farm Credit West common stock or participation certificates. Farm Credit West retains a first lien on the preferred stock owned by members and such equities are unprotected and at-risk in accordance with the Farm Credit Act. Retirement of preferred stock upon the holder’s request is at the sole discretion of the Board, or by Farm Credit West’s president when consistent with authority delegated by the Board.

Holders of preferred stock are entitled to vote on amendments to the Bylaws that would affect a preference accorded to the preferred stock. Each customer’s initial subscription must be for a minimum of $5 thousand. No subscription to a single investor will exceed 5% of the prior month end’s outstanding preferred stock balance. In accordance with Board policy, at December 31, 2012, the maximum new investment was $4 million, although a higher limit was allowable under FCA guidance. The $4 million limit was put in place to promote equitable use of the program among stockholders.

Dividends on each share of preferred stock accrue on a daily basis at the dividend rate on the par value of such share. Preferred stock dividends will accrue whether or not they have been declared and whether or not there are profits, retained earnings, or other funds of Farm Credit West legally available for the payment of dividends. Accrued dividends will accumulate (up to and including the date of payment thereof) until declared and paid. Dividends are declared in the order accrued (i.e., oldest first), but will not be payable unless and until declared by the Board. The Board is not under any

obligation to declare and pay dividends annually or on any other periodic basis. Accrued but unpaid dividends will not bear interest, nor will dividends accrue on unpaid accrued dividends. Dividends may only be declared and paid out of undistributed and unallocated net earnings of Farm Credit West, and then only if, after such declaration or payment, Farm Credit West will meet minimum prescribed regulatory capital adequacy requirements. So long as any shares of preferred stock are outstanding, Farm Credit West may not pay or declare any dividend on any class of its capital stock or distribute any patronage dividends, unless all accrued dividends on preferred stock as of the end of the most recent calendar month shall have been paid or declared and a sum set aside in payment thereof.

The dividend rate is a per annum rate which is subject to change each calendar month. For any particular month, the dividend rate shall not exceed 8% nor be less than the federal funds rate. At December 31, 2012 and throughout 2012, the preferred stock dividend rate was 2.00%. The average preferred stock dividend rate was 2.42% in 2011 and 2.50% in 2010.

All shares approved for retirement will be retired at an amount equal to the share’s par value, plus accrued but unpaid dividends. In addition, Farm Credit West may “call” (retire) all or any portion of a holder’s preferred stock at any time for the preferred stock’s par value plus accrued but unpaid dividends.

Preferred stock is a component of permanent capital, but may not exceed 25% of calculated permanent capital. Preferred stock is not surplus and is not included in total or core surplus for regulatory capital ratio calculation purposes.

Common Equity Outstanding – Class C Capital Stock and Class F Participation Certificates

Each owner of class C capital stock is entitled to a single vote. Other classes of borrower equities do not provide general voting rights to their owners. Voting stock may not be transferred to another person unless such person is eligible to hold voting stock. At December 31, 2012, Farm Credit West had 721,654 shares of class C capital stock and 47,781 shares of class F participation certificates outstanding, all at a par value of five dollars per share/unit.

Under certain circumstances, Farm Credit West is also authorized to issue class A common stock. No such stock has been outstanding in the past three years.

Unallocated Retained Earnings

Net income can be distributed annually in the form of cash or allocated retained earnings; it may also be retained as unallocated retained earnings. Thus, unallocated retained earnings include patronage-sourced net income that is retained each year. The Board must approve any use of unallocated retained earnings.


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Any net losses, to the extent they exceed any contingency reserve and unallocated retained earnings shall, except as otherwise provided in the Farm Credit Act, be treated as impairing: first, unallocated retained earnings evidenced by nonqualified written notices of allocation; second, allocated retained earnings evidenced by qualified written notices of allocation in the reverse order of issuance until all such allocated retained earnings has been impaired; third, to all classes of common stock and participation certificates until fully impaired; and fourth, to preferred stock until fully impaired.

In the event of liquidation or dissolution of Farm Credit West, any assets remaining after payment or retirement of all liabilities shall be distributed in the following order of priority. First, to the holders, pro rata, of all classes of preferred stock until an amount equal to the aggregate par value of all such shares then issued and outstanding has been distributed to such holders. Second, to the holders, pro rata, of all classes of common stock and participation certificates, until an amount equal to the aggregate par value of all such shares then issued and outstanding has been distributed to such holders. Third, to the holders of allocated retained earnings evidenced by qualified written notices of allocation. Fourth, to the holders of unallocated retained earnings evidenced by nonqualified written notices of allocation. Fifth, any remaining assets after such distributions shall be distributed to present and former patrons on a patronage basis, to the extent practicable.

Patronage Distributions

Consistent with its bylaws which provide for the allocation of patronage dividends, Farm Credit West operates under Subchapter T of the Internal Revenue code (i.e., the Association operates as a cooperative). All patronage distributions to a borrower are on such proportionate patronage basis as may be approved by the Board.

Farm Credit West allocates 100% of its patronage-sourced income before income taxes, less preferred stock dividends paid, to its patrons. At each year-end, the Board evaluates whether to retain Farm Credit West’s net income to strengthen its capital position or to distribute a portion of the net income to customers by declaring a qualified/cash patronage dividend. That portion of Farm Credit West’s patronage-sourced income before income taxes, less preferred stock dividends paid, not distributed in cash is also allocated to patrons. In accordance with Internal Revenue Service requirements, each customer is sent a nonqualified written notice of allocation. Allocated, but not distributed patronage dividends, are included in Farm Credit West’s unallocated retained earnings account and, in accordance with generally accepted accounting principles, are reported as unallocated retained earnings on the accompanying Consolidated Balance Sheet and Consolidated Statement of Changes in Members’ Equity. Such allocations may provide a future basis for a distribution of capital. The Farm Credit West Board

considers these unallocated retained earnings to be permanently invested in the Association. As such, there is no current plan to revolve or redeem these amounts. No express or implied right to have such capital retired or revolved at any time is granted.

The Board approved a cash patronage distribution of $51.0 million out of 2012 patronage-sourced income before income taxes of $151.3 million; that $51.0 million is to be paid in early 2013. The Board approved a cash patronage distribution of $33.0 million out of 2011 patronage-sourced income before income taxes of $142.0 million; that $33.0 million was paid in early 2012. The Board approved a cash patronage distribution of $32.0 million out of 2010 patronage-sourced income before income taxes of $105.6 million; that $32.0 million was paid in early 2011. A cash patronage distribution of $31.0 million was paid in early 2010.

Accumulated Other Comprehensive Income

Farm Credit West reports other comprehensive income (loss) as a component of comprehensive income in the accompanying Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Members’ Equity and accumulated other comprehensive income as a component of retained earnings in the accompanying Consolidated Balance Sheet.

For the years ended December 31, 2012, December 31, 2011, and December 31, 2010, other comprehensive income (loss) results from two sources. First, Farm Credit West records other comprehensive income (loss) based on the market value of the Association’s investment securities – available-for-sale. In addition, as described in Note 12, the pension-related other comprehensive loss resulted primarily from the unrecognized net actuarial loss component of the Pension Restoration Plan liability.

The following is a summary of accumulated other comprehensive income included in the Consolidated Balance Sheet.


Unrealized gain on investment securities – available-for-sale 6,144$ 7,478$ 7,745$

(2,081) (1,166) (1,737)

Accumulated other comprehensive income 4,063$ 6,312$ 6,008$

Unrecognized net actuarial loss and unrecognized prior service credit on Pension Restoration Plan


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Note 10 – Patronage Distributions from Farm Credit Institutions

Patronage income recognized from Farm Credit institutions follows.


CoBank/AgBank 27,880$ 42,993$ 9,631$ Other Farm Credit institutions 715 306 112

Total patronage income 28,595$ 43,299$ 9,743$

Patronage distributions from CoBank relating to the Association’s average direct note borrowings are distributed in cash. For CoBank patronage relating to average participated loan volume, a portion of the annual patronage is distributed in cash and the remainder in the form of allocated equity.

The amount declared in December 2012 was accrued and will be paid by CoBank in March 2013. The amount declared in December 2011 was accrued in 2011 and received in March 2012. Patronage received in March 2011 and March 2010 was recognized as received.

Note 11 – Income Taxes

The provision for (benefit from) income taxes follows.


Current federal tax provision 105$ 49$ (51)$ Current state tax provision 29 26 (19) Deferred federal tax benefit — (753) (11)

Provision for (benefit from) income taxes 134$ (678)$ (81)$

The provision for (benefit from) income tax differs from the amount of income tax determined by applying the applicable U. S. statutory federal income tax rate to pretax income as quantified in the following table.


Federal tax at statutory rate 51,546$ 59,898$ 35,950$ State tax, net 19 17 (13) Effect of non-taxable FLCA subsidiary (41,153) (45,977) (25,013) Patronage distribution declared by taxable entities (17,340) (11,220) (10,880) AgBank recapitalization distribution — (3,670) — Increase in deferred tax asset valuation allowance 7,098 289 — Prior year tax adjustments 11 (15) (101) Other (47) — (24)

Provision for (benefit from) income taxes 134$ (678)$ (81)$

As detailed in the following table, deferred tax assets and liabilities are established considering the commitment of the Farm Credit West Board and management to make operating decisions that will utilize such deferred tax assets. The Association recorded a valuation allowance of $7.4 million in 2012 and $0.3 million in 2011. The Association will continue to evaluate the realizability of the deferred tax assets and adjust the valuation allowance accordingly.

Deferred tax assets and liabilities are comprised of the following at the dates indicated.


Deferred tax assets: Allowance for loan losses 7,260$ 7,046$ 5,575$ Unrealized losses on

other property owned 3,095 2,811 1,415 Nonaccrual income 1,459 1,014 1,860 Loss carryforwards 310 231 230

Gross deferred tax assets 12,124 11,102 9,080 Less: valuation allowance (7,387) (289) —

Deferred tax assets, net of valuation allowance 4,737 10,813 9,080

Deferred tax liabilities: Lease adjustment (2,128) (8,746) (9,244) Patronage distribution from

AgBank — (1,358) — Patronage distribution from

CoBank (2,609) (697) (578) Other — (12) (11)

Gross deferred tax liabilities (4,737) (10,813) (9,833)

Net deferred tax liability —$ —$ (753)$


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During 2012, Farm Credit West changed the tax-basis income recognition method for the leasing portfolio. The cumulative effect of the change reduced the lease-related deferred tax liability by $5.7 million.

Farm Credit West has no uncertain tax positions to be recognized as of December 31, 2012, 2011, or 2010.

The Association recognizes interest and penalties related to unrecognized tax positions as an adjustment to income tax expense. The tax years that remain open for federal and major state income tax jurisdictions are 2009 and forward.

Pursuant to its bylaws, the Farm Credit West (and subsidiaries) Board has maintained in effect patronage resolutions that, subject to first making other bylaw-required applications (including the setting aside of necessary and appropriate additions to unallocated retained earnings), call for Farm Credit West to be operated as a cooperative utilizing a patronage program. In years when operational circumstances allow, patronage allocations will be declared based on that year’s results with payment occurring early in the following year. See the Patronage Distributions section of Note 9 for a history of patronage declarations and payments.

Note 12 – Employee Benefit Plans

Certain Farm Credit West employees participate in a multi-employer defined benefit retirement plan (Defined Benefit Plan). The Department of Labor has determined the plan to be a governmental plan; therefore, the plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA). As the plan is not subject to ERISA, the plan’s benefits are not insured by the Pension Benefit Guaranty Corporation. Accordingly, the amount of accumulated benefits that participants would receive in the event of the plan’s termination is contingent on the sufficiency of the plan’s net assets to provide benefits at that time. This is a noncontributory plan which covers eligible employees. Benefits are based on salary and years of service.

The multi-employer Defined Benefit Plan reflects an unfunded liability totaling $78.4 million at December 31, 2012. The pension benefits funding status reflects the net of the fair value of the plan assets and the projected benefit obligation. The projected benefit obligation of the plan was $219.4 million at December 31, 2012 and $216.3 million at December 31, 2011. The fair value of the plan assets was $141.0 million at December 31, 2012 and $143.6 million at December 31, 2011.

Defined Benefit Plan costs are determined for each individual employer based on costs directly related to their current employees as well as an allocation of the remaining costs based proportionately on the estimated projected liability of the employer under the plan. Farm Credit West recognizes its proportional share of expense and contributes its

proportional share of funding. Total plan expense for participating employers was $8.8 million in 2012, $1.8 million in 2011, and $8.4 million in 2010. The Association’s allocated share of plan expenses included in salaries and employee benefits was $0.8 million in 2012, $0.5 million in 2011, and $1.6 million in 2010. Participating employers contributed $5.7 million in 2012, $0.2 million in 2011, and $6.0 million in 2010 to the plan. The Association’s allocated share of these pension contributions was $1.4 million in 2012, $0.1 million in 2011, and $1.2 million in 2010. While the plan is a governmental plan and is not subject to minimum funding requirements, the employers contribute amounts necessary on an actuarial basis to provide the plan with sufficient assets to meet the benefits to be paid to participants. The amount of the total employer contributions expected to be paid into the pension plans during 2013 is $3.7 million. Farm Credit West’s allocated share of these pension contributions is expected to be $0.9 million.

Eligible current and retired employees of Farm Credit West are provided postretirement benefits other than pensions through the Farm Credit Foundations Retiree Medical Plan and Retiree Life Plan. Benefits provided are determined on a graduated scale, based on years of service. The anticipated costs of these benefits are accrued during the period of the employee’s active service. Postretirement benefits (primarily health care benefits) included in salaries and employee benefits expense were less than $0.1 million in each of 2012, 2011, and 2010. These expenses are equal to Farm Credit West’s cash contributions for each year.

Farm Credit West also participates in a non-qualified defined benefit plan (Pension Restoration Plan) that is unfunded. The purpose of this plan is to supplement a participant’s benefits under the Defined Benefit Plan to the extent that such benefits are reduced by the limitations imposed by the Internal Revenue Code. Benefits payable under the Pension Restoration Plan are offset by a reduction in the benefits payable from the Defined Benefit Plan. Pension Restoration Plan expenses included in salaries and employee benefits were $0.4 million in 2012, $0.7 million in 2011, and $0.5 million in 2010.


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The funded status and the amounts recognized in Farm Credit West’s Consolidated Balance Sheet for the Pension Restoration Plan follow.


Change in benefit obligation: Beginning benefit obligation 3,985$ 3,995$ 3,543$ Service cost 68 227 101 Interest cost 201 214 121 Actuarial loss/(gain) 1,088 (356) 325 Benefits paid (915) (95) (95)

Ending benefit obligation 4,427 3,985 3,995

Change in plan assets: Company contributions 915 95 95 Benefits paid (915) (95) (95)

Ending fair value of plan assets — — —

December 31 net amount recognized (accrued benefit liability) (4,427)$ (3,985)$ (3,995)$

Amounts included in accumulated other comprehensive loss for the Pension Restoration Plan on Farm Credit West’s Consolidated Balance Sheet follow.


Unrecognized net actuarial loss 2,081$ 1,166$ 1,771$ Unrecognized prior service credit — — (34)

Accumulated other comprehensive loss recognized 2,081$ 1,166$ 1,737$

An estimated net actuarial loss of $0.3 million for the Pension Restoration Plan will be amortized into income during 2013.

The projected benefit obligation and accumulated benefit obligation for the Pension Restoration Plan follow.


Projected benefit obligation 4,427$ 3,985$ 3,995$ Accumulated benefit obligation 3,677$ 3,709$ 3,724$

Components of net periodic pension expense for the Pension Restoration Plan included in Farm Credit West’s Consolidated Statement of Comprehensive Income follow.


Service cost 68$ 227$ 101$ Interest cost 201 214 121 Net amortization and deferral 173 215 259

Net periodic benefit cost 442$ 656$ 481$

Changes in benefit obligation recognized in other comprehensive income/loss are included in the following table.


Current year net actuarial loss/(gain) 1,088$ (356)$ 325$ Amortization of: Prior service credit — 34 45 Net actuarial loss (173) (249) (304)

Total recognized in other comprehensive loss/(income) 915$ (571)$ 66$

Weighted average assumptions used to determine benefit obligation follow.

December 31, 2012 2011 2010

Discount rate 4.05% 5.05% 5.35%Rate of compensation increase 4.50% 4.50% 4.50%

Weighted average assumptions used to determine net periodic benefit cost follow.

December 31, 2012 2011 2010

Discount rate 5.05% 5.35% 5.60%Rate of compensation increase 4.50% 4.50% 4.50%

The Association expects to contribute $0.8 million to the Pension Restoration Plan in 2013.


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The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid.

(in thousands)

2013 824$ 2014 844$ 2015 986$ 2016 986$ 2017 164$

2018 through 2022 17$

Pension Restoration Benefits

Farm Credit West participates in the Farm Credit Foundations Defined Contribution Plan (Defined Contribution Plan). The Defined Contribution Plan has two components. Employees who do not participate in the Defined Benefit Plan may receive benefits through the Employer Contribution portion of the Defined Contribution Plan. In this plan, Farm Credit West provides a monthly contribution based on a defined percentage of the employee’s salary. Employees may also participate in a Salary Deferral Plan governed by Section 401(k) of the Internal Revenue Code. Farm Credit West matches a certain percentage of employee contributions. Employer contributions to these plans were $1.5 million, $1.4 million, and $1.3 million for the years ended December 31, 2012, 2011, and 2010, respectively.

Note 13 – Related Party Transactions

In the ordinary course of business, Farm Credit West may enter into loan transactions with directors and full-time officers of Farm Credit West, directors and full-time officers of CoBank, the immediate families of such officers and directors, and other organizations with which such officers and directors may be affiliated. Such loans to directors and full-time officers are subject to special approval requirements contained in System regulations and are made on the same terms, including interest rates, amortization schedule, and collateral, as those prevailing at the time for comparable transactions with unrelated borrowers. (There were no loans outstanding to full-time officers at December 31, 2012.)

Information related to loans/leases and loans related to Farmer Mac-guaranteed securities made to such persons are shown below.


Loan funds advanced 174,683$ 131,032$ 88,253$ Loan repayments 176,016$ 135,308$ 93,307$ Ending loan balances 168,862$ 160,404$ 165,148$

In the opinion of management, none of these loans outstanding at December 31, 2012 involved more than a normal risk of collectability.

Farm Credit West has a director loan quality policy that, unless waived in specific instances ensuring Association safety and soundness, calls for a director to immediately resign and be ineligible for appointment, election, or reelection if that director is obligated to FCW on a loan that is subject to adverse circumstances. If a waiver is permissible, the director must prepare a signed corrective plan detailing plans to eliminate the adverse circumstance within a specified period. Additionally, Farm Credit West has an employee loan quality policy calling for various authorities and responsibilities of an employee to be suspended if the employee is party to a loan that becomes delinquent or adversely classified.

The following table shows information related to the preferred stock holdings of Association directors.


Preferred stock issued 67$ 92$ 727$ Preferred stock retired 20$ 56$ 275$ Ending preferred stock balances 3,053$ 2,945$ 2,840$

Association employees are not eligible to hold preferred stock.

Farm Credit West also has business relationships with certain other System entities. During 2012, the Association paid $4.9 million to Financial Partners, Inc. for technology services.

Farm Credit West Executive Vice President Ernest M. Hodges served on the Farmer Mac board of directors from 2005 through June 2012. As discussed in Note 2 and Note 4, Farm Credit West owns mortgage-backed securities resulting from the securitization of mortgage loans with Farmer Mac. As discussed in Note 3, Farm Credit West obtains credit enhancements from Farmer Mac in return for a reduction in loan yield.

During Mr. Hodges’ tenure on the board, Farmer Mac directors received stock options or restricted stock grants as part of their annual compensation. As part of an agreement with Farm Credit West, Mr. Hodges has assigned his entire interest in all Farmer Mac stock options and grants to the Association. During 2012, grants related to 3,485 shares of Farmer Mac stock were exercised, the shares were sold, and a gain of $0.1 million was recorded in other noninterest income on Farm Credit West’s Consolidated Statement of Comprehensive Income. During 2011, grants related to 4,099 shares were exercised, the shares were sold, and a gain of $0.1 million was recorded in other noninterest income. During 2010, grants related to 8,432 shares were exercised, the shares were sold, and a gain of $0.1 million was recorded. As of December 31, 2012, Farm Credit West no longer has a financial interest in any options, grants, or shares of stock relating to Mr. Hodges’ service on the Farmer Mac board.


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Note 14 – Regulatory Enforcement Matters

There are no regulatory enforcement actions in effect for Farm Credit West.

Note 15 – Commitments and Contingencies

Farm Credit West has various commitments outstanding and contingent liabilities.

Farm Credit West may participate in financial instruments with off-balance sheet risk to satisfy the financing needs of its borrowers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the financial statements.

Commitments to extend credit are agreements to lend to a borrower as long as there is not a violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At December 31, 2012, $2.0 billion in commitments to extend credit were outstanding; $20.1 million of those commitments were associated with standby letters of credit.

Since many of these commitments are expected to expire without being drawn upon, the total commitments do not necessarily represent future cash requirements. However, these credit-related financial instruments have off-balance-sheet credit risk because their amounts are not reflected on Farm Credit West’s Consolidated Balance Sheet until funded or drawn upon.

Farm Credit West participates in standby letters of credit to satisfy the financing needs of its borrowers. These letters of credit are irrevocable agreements to guarantee payment of specified financial obligations. Farm Credit West’s agreement to guarantee is supported by a commitment to repay Farm Credit West from the borrower on whose behalf the letter of credit was issued. At December 31, 2012, $20.1 million of standby letters of credit were outstanding. Given the borrower obligations that support these letters of credit, combined with the modest marginal fees charged and modest marginal expenses incurred in their extension, management deems these standby letters of credit to have no fair value. At December 31, 2012, $13.2 million of those letters of credit expire in 2013; $1.3 million expire in 2014, $1.3 million expire in 2015, $4.1 million expire in 2016 and $0.2 million expire in 2017.

The credit risk associated with issuing commitments and letters of credit is substantially the same as that involved in extending loans to borrowers. Management applies the same credit policies to these instruments. Upon fully funding an instrument, the credit risk amounts are equal to the contract amounts and the potential for loss from such transactions is subject to borrower repayment or the value of collateral

securing the loan (if any). The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the borrower. Farm Credit West does not anticipate any material losses as a result of these commitment or letter of credit transactions.

In the ordinary course of business Farm Credit West may be party to legal claims in which monetary damages are asserted. Management is unaware of any pending claims for which the ultimate liability would have a material effect on Farm Credit West’s financial position or results of operations.

Note 16 – Fair Value Measurements

Accounting guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. The fair value measurement is not an indication of liquidity. See Note 2 for additional information. Assets measured at fair value on a recurring basis for each of the fair value hierarchy values are summarized below. There were no other assets and no liabilities measured at fair value on a recurring basis for the periods presented.

Fair ValueMeasurement Using

Significant Unobservable(in thousands) Inputs (Level 3) Total Fair Value

Assets: Investment securities – available-for-sale

December 31, 2012 171,442$ 171,442$ December 31, 2011 202,944 202,944 December 31, 2010 235,417 235,417

The table below represents a reconciliation of Farm Credit West’s investment securities – available-for-sale measured at fair value on a recurring basis for each of past three years.

Fair Value Measurement UsingSignificant Unobservable Inputs (Level 3)Investment securities – available-for-sale

(in thousands) 2012 2011 2010


Unrealized losses included in other comprehensive loss (1,334) (267) (722) Settlements (30,168) (32,206) (37,394)



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Assets measured at fair value on a non-recurring basis for each of the fair value hierarchy values are summarized in the following table. There were no other assets and no liabilities measured at fair value on a non-recurring basis for the periods presented.

TotalFair Value Losses, Net

Measurement Using Total IncurredSignificant Unobservable Fair During

(in thousands) Inputs (Level 3) Value the Year

Assets:

December 31, 2012 34,188$ 34,188$ (14,044)$ December 31, 2011 52,978 52,978 (19,674) December 31, 2010 23,550 23,550 (11,020)

December 31, 2012 29,970$ 29,970$ (3,197)$ December 31, 2011 66,969 66,969 (7,917) December 31, 2010 86,866 86,866 (4,480)

Nonaccrual loans, net of related specific allowance

Other property owned, appraised value

Valuation Techniques

As more fully discussed in Note 2, accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following represents a brief summary of the valuation techniques used by Farm Credit West for assets and liabilities subject to fair value measurement.

Investment Securities: Where quoted prices are available in an active market, available-for-sale securities would be classified as Level 1. If quoted prices are not available in an active market, the fair value of securities are estimated using pricing models, quoted prices for similar securities received from pricing services or discounted cash flows. Generally, these securities would be classified as Level 2. This would include certain mortgage-backed and asset-backed securities. Where there is limited activity or less transparency around inputs to the valuation, the securities are classified as Level 3. Securities classified as Level 3 include Farm Credit West’s mortgage-backed securities issued by the Federal Agricultural Mortgage Corporation, the valuation of which involves significant unobservable inputs. Farm Credit West values its investment securities – available-for-sale by determining the present value of that security using a comparison of (a) the existing interest rates on its securitized loans to (b) the current, adjusted market interest rate for securities with similar characteristics, and valuing accordingly.

Farm Credit West’s held-to-maturity investment securities are carried at amortized cost.

Loans: For certain loans evaluated for impairment, the fair value was based on the underlying collateral for collateral-

dependent loans. At December 31, 2012, substantially all of the Association’s impaired loans that are recorded at fair value are secured by real estate. The fair value measurement process uses appraisals performed by independent licensed appraisers and other market-based information, but in many cases it also requires significant input based on management’s knowledge of and judgment about current market conditions, specific issues relating to the collateral and other matters. As a result, these fair value measurements fall within Level 3 of the hierarchy. When the value of the real estate, less estimated costs to sell, is less than the principal balance of the loan, a specific reserve is established in order to recognize the fair value. Impaired loans are reviewed and evaluated periodically for additional impairment, and reserves are adjusted accordingly.

Other Property Owned: The process for measuring the fair value of other property owned involves the use of appraisals or other market-based information. As a result, these fair value measurements fall within Level 3 of the hierarchy. Costs to sell represent transaction costs and are not included as a component of the asset’s fair value.

Note 17 – Disclosures about Fair Value of Financial Instruments

The following tables present the carrying amounts and fair values of Farm Credit West's financial instruments at December 31, 2012, 2011, and 2010. Quoted market prices are generally not available for certain financial instruments, as described below. Accordingly, fair values are based on judgments regarding anticipated cash flows, future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates involve uncertainties and matters of judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The estimated fair values of Farm Credit West’s financial instruments follow.

Carrying FairDecember 31, (in thousands) Amount Value

Financial assets: Loans 6,078,186$ 6,134,728$ Allowance for loan losses (33,200) Net loans 6,044,986 6,134,728

Investment securities 230,926 233,116 Cash 35,878 35,878

Financial liabilities: Note payable to CoBank/AgBank 5,051,003$ 5,169,888$ Future payment funds 332,000 332,000 Commitments to extend credit — — Standby letters of credit — —

2012


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Investment securities 271,556 274,241 Cash — —


2011



Investment securities 315,118 317,793 Cash — —


2010

Following is a description of the methods and assumptions used to estimate the fair value of each class of Farm Credit West’s financial instruments for which it is practicable to estimate that value.

Loans

Fair value is estimated by discounting the expected future cash flows using Farm Credit West's current interest rates at which similar loans would be made to borrowers with similar credit risk. The discount rates are based on the District’s current loan origination rates as well as Farm Credit West’s estimates of credit risk. Management has no basis to determine whether the estimated fair values presented would be indicative of the assumptions and adjustments that a purchaser of Farm Credit West’s loans would seek in an actual sale.

For purposes of determining fair value of accruing loans, the loan portfolio is segregated into pools of loans with similar characteristics. Expected future cash flows and interest rates reflecting appropriate credit risk are separately determined for each individual pool.

Fair value of loans in a nonaccrual status is estimated as described above, with appropriately higher interest rates, which reflect the uncertainty of continued cash flows.

Investment Securities

Fair value is estimated as described in Note 16. An active market does not exist for Farmer Mac agricultural mortgage-backed securities.

Cash

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

Note Payable to CoBank/AgBank

The note payable is segregated into pricing pools according to the types and terms of the loans (or other assets) which they fund. Fair value of the note payable is estimated by discounting the anticipated cash flows of each pricing pool using the current rate that would be charged for borrowings. For purposes of this estimate, it is assumed the cash flow on the note payable is equal to the principal payments on Farm Credit West’s loans receivable plus accrued interest on the note payable.

Future Payment Funds

The carrying value of future payment funds is a reasonable estimate of fair value.

Commitments to Extend Credit and Standby Letters of Credit

The carrying value of loan commitments and standby letters of credit are a reasonable estimate of fair value. Farm Credit West assigns no carrying value to loan commitments or letters of credit. Substantially all standby letters of credit are associated with variable rate loan products. Substantially all fixed rate loan commitments expire within 30 days.

Note 18 – Subsequent Events

The Association has evaluated subsequent events through March 7, 2013, which is the date the financial statements were issued. No material subsequent event items met the criteria for disclosure.

Disclosure Information Required by

Farm Credit Administration Regulations

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Description of Business

The description of the territory served, persons eligible to borrow, types of lending activities engaged in and financial services offered, and related Farm Credit organizations required to be disclosed in this section is incorporated herein by reference from Note 1 to the financial statements included in this Annual Report.

The description of significant developments that had or could have a material impact on earnings or interest rates to borrowers, acquisitions or dispositions of material assets, material changes in the manner of conducting the business, seasonal characteristics, and concentrations of assets, if any, required to be disclosed in this section is incorporated herein by reference from “Management’s Discussion and Analysis” included in this Annual Report.

Legal Proceedings

Information required to be disclosed in this section is incorporated herein by reference from Note 15 to the financial statements included in this Annual Report.

Description of Capital Structure

Information required to be disclosed in this section is incorporated herein by reference from Note 9 to the financial statements included in this Annual Report.

Description of Liabilities

The description of debt outstanding required to be disclosed in this section is incorporated herein by reference from Note 8 to the financial statements included in this Annual Report.

The description of contingent liabilities required to be disclosed in this section is incorporated herein by reference from Notes 1 and 15 to the financial statements in this Annual Report.

Selected Financial Data

The selected financial data for the five years ended December 31, 2012 required to be disclosed in this section is incorporated herein by reference from the “Five-Year Summary of Selected Financial Data” in this Annual Report.


“Management’s Discussion and Analysis” in this Annual Report is required to be disclosed in this section and is incorporated herein by reference.

Board of Directors’ Charter, Code of Ethics, and Independence

The Farm Credit West Board of Directors has adopted a Charter to support the Board’s leadership and oversight role in the accomplishments of the Association’s mission. Also, the Board has adopted a Code of Ethics, whereby the Board and each director commit to conduct business in accordance with the highest ethical standards. In accordance with the

Farm Credit West Board of Directors’ Charter, annually the Corporate Governance Committee determines the independence of each director (as defined in the subject Charter). Evaluating each situation using established “independence” criteria, the Board has determined each Farm Credit West director to be “independent” in accordance with those criteria. Both the Charter and Code of Ethics documents can be viewed on the Farm Credit West web site (www.farmcreditwest.com).

Board Committees

Farm Credit West maintains three committees that are primarily composed of directors: a Corporate Governance Committee, an Audit Committee, and a Human Capital and Compensation/Evaluation Committee. The members of those committees are identified individually below. The full Board considers these committees to have the range of expertise and experience to meet their responsibilities.

Corporate Governance Committee

Farm Credit West’s Corporate Governance Committee is comprised of the chairman of the Board of Directors (who also chairs this Corporate Governance Committee), the vice chairman of the Board, the chairman and vice chairman of the Audit Committee, the chairman and vice chairman of the Human Capital and Compensation/Evaluation Committee, the prior chairman of the Board, and the president. The Corporate Governance Committee meets on an “as needed” basis to act on broad issues, typically when the full board is not available to meet. A copy of the Corporate Governance Committee Charter can be obtained by members upon request.

Human Capital and Compensation/Evaluation Committee

Farm Credit West’s Human Capital and Compensation/ Evaluation Committee meets as needed to discuss broad compensation and evaluation issues. These responsibilities include, but are not limited to, annually reviewing/approving Farm Credit West’s incentive compensation programs, establishing performance standards for the president, and conducting the president’s performance evaluation. A copy of the Human Capital and Compensation/Evaluation Committee Charter can be obtained by members upon request.

Audit Committee

Farm Credit West’s Audit Committee manages the audit function as detailed in an internal audit policy and an Audit Committee charter. The Audit Committee charter calls for the Audit Committee to consist of at least four and no more than eight members of the Board. At least one Audit Committee member is to be an “appointed” director with financial management expertise. All members of the Audit Committee are financially literate and at least one member is designated a financial expert. A report of Audit Committee



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activities is included in this Annual Report. A copy of the Audit Committee Charter can be obtained by members upon request.

The Audit Committee: (1) assists the full Board in fulfilling its oversight responsibilities for the financial reporting process, the system of internal control, the audit process, and the process for monitoring compliance with laws/regulations; (2) pre-approves all auditing and non-audit services provided by independent auditors and reviews/approves the annual audit plan including the audit plans of the director of internal audit and the independent auditors; (3) evaluates the adequacy and effectiveness of internal controls; (4) evaluates examination reports prepared by FCA, as well as reviews performed by CoBank, independent auditors, and the director of internal audit, and determines the appropriateness of management’s responses and corrective action efforts; (5) appoints, compensates, and oversees the work of the independent auditors; (6) appoints, compensates and oversees the work of the director of internal audit; (7) regularly reports to the full Board about Audit Committee activities; (8) establishes and maintains procedures for the receipt, retention, and treatment of complaints regarding accounting, internal controls, or auditing matters.

As appropriate, the full Board, reviews material discrepancies and/or recommendations and follows-up on responses prepared by management, as deemed necessary.

Directors

Farm Credit regulations require the disclosure of directors’ business experience for the last five years, other entities on whose board the director serves, compensation received as a Farm Credit West director, and certain other information. Compensation amounts are presented in whole dollars.

Edgar A. Terry, Chairman of the Board of Directors

Term of Office: Mr. Terry has served on the Board since 1992. His current term ends in 2014.

During the past five years, Mr. Terry has been involved in vegetable and strawberry production/marketing and has been a Senior Adjunct at California Lutheran University. Mr. Terry chairs the Farm Credit West Corporate Governance Committee. He is president of Terry Farms (which produces and markets vegetables); president of Willal, Inc. (sales and marketing) and president of Crop Genius, Inc (software development and sales). Mr. Terry serves on the boards of Terry Farms Inc.; Willal, Inc.; Rancho Adobe, Inc. (a lessee and lessor of farmland); Crop Genius Inc.; Central A.P. (real estate partner); and JJE Managing Partner (real estate management). He also serves as the vice chairman for the California Strawberry Commission and treasurer of the Ventura County Fair Foundation. Mr. Terry is also chief financial officer for the D63 Umpire Association, and chairman of the executive committee of Leavens Ranches. In

2012, Mr. Terry served 16 days at Board and Board committee meetings and 13 days in other official activities on behalf of the Board, for which he was compensated $42,250.

Blake Harlan, Vice Chairman of the Board of Directors

Term of Office: Mr. Harlan has served on the Board since 2003. His current term ends in 2017.

During the past five years, Mr. Harlan has been president of Harlan Family Ranch., which farms row crops, including tomatoes, wheat, corn, and sunflowers. He is also a partner in Wilson Bend Farms, a rice operation, and Harlan Feed, which manufactures hay cubes for feed. Mr. Harlan serves as vice chairman of the Farm Credit West Corporate Governance Committee. In 2012, Mr. Harlan served 18 days at Board and Board committee meetings and 10 days in other official activities on behalf of the Board, for which he was compensated $35,250.

Joseph C. (Joey) Airoso, Director

Term of Office: Mr. Airoso has served on the Board since 2007. His current term ends in 2013.

During the past five years, Mr. Airoso has been involved in owning and operating a family-owned dairy and farm. Mr. Airoso serves as vice chairman of the Farm Credit West Human Capital and Compensation/Evaluation Committee and also serves on the Corporate Governance Committee. He is a director of the Tulare County Farm Bureau; Tulare Union High School Ag Advisory; College of Sequoias Ag Advisory; Central Valley Dairy Ground Water Monitoring Board; and Dairyman PAC. He also serves on the finance committee for St. John Catholic Church. In 2012, Mr. Airoso served 13 days at Board and Board committee meetings and 11 days at other official activities on behalf of the Board, for which he was compensated $31,000.

Robert Amarel, Jr., Director

Term of Office: Mr. Amarel has served on the Board since 2007. His current term ends in 2013.

During the past five years, Mr. Amarel has managed Reason Farms, which is involved in growing prunes, walnuts, wheat and also owns commercial properties. Mr. Amarel serves on the Farm Credit West Human Capital and Compensation/ Evaluation Committee. He is also a director of Sunsweet Growers, a prune processing and marketing cooperative; the California Dried Plum Board, a prune marketing committee; and a Farm Bureau member ag spokesman. In 2012, Mr. Amarel served 12 days at Board and Board committee meetings and 11 days in other official activities on behalf of the Board, for which he was compensated $30,500.

Alben F. Barkley, Appointed Director

Term of Office: Mr. Barkley has served on the Board since 1991. His current term ends in 2016.



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During the past five years, Mr. Barkley has been involved in the management of commercial insurance companies/ agencies. Mr. Barkley serves on the Farm Credit West Human Capital and Compensation/Evaluation Committee. He is president of Barkley Insurance & Risk Management Services. In 2012, Mr. Barkley served 12 days at Board and Board committee meetings and five days in other official activities on behalf of the Board, for which he was compensated $27,000.

Gregory O. (Butch) Dias, Jr., Director

Term of Office: Mr. Dias has served on the Board since 2000. His current term ends in 2014.

During the past five years, Mr. Dias has been involved in Delta View Farms, a dairy and farm operated by him and his two sons. Mr. Dias serves on the Farm Credit West Human Capital and Compensation/Evaluation Committee. Since 1996, he has been a member of the District 9 committee of the California Milk Advisory Board (a producer-funded generic marketing organization promoting dairy products made from California milk) and was previously chairman of that organization. Mr. Dias is also a director of the California Jersey Cattle Association (which promotes Jersey breed improvement) and chairman of the California Dairy Foods Research Foundation. In 2012, Mr. Dias served 15 days at Board and Board committee meetings and five days in other official activities on behalf of the Board, for which he was compensated $29,000.

Richard J. Enns, Director

Term of Office: Mr. Enns has served on the Board since 1995. His current term ends in 2015.

During the past five years, Mr. Enns has owned and managed a farming operation raising almonds, vegetables and other irrigated field crops. Mr. Enns serves as vice chairman of the Farm Credit West Audit Committee and also serves on the Corporate Governance Committee. He also serves as a director of the Rosedale-Rio Bravo Water Storage District (a banker and distributor of irrigation water). In 2012, Mr. Enns served 17 days at Board and Board committee meetings and 10 days in other official activities on behalf of the Board, for which he was compensated $32,000.

Douglas C. Filipponi, Director

Term of Office: Mr. Filipponi has served on the Board since 2006. His current term ends in 2015.

During the past five years, Mr. Filipponi has been president of Filipponi-Thompson Drilling, Inc. (which drills water wells) and managing partner of Margarita Vineyards, LLC (a producer and marketer of wine grapes). He is also managing partner of Santa Margarita Cattle Company, LLC and owner-operator of Vaquero Water Ranch (a cow-calf ranch). He is co-owner and chief operating officer of Ancient Peaks Winery, Inc. Mr. Filipponi serves on the Farm Credit West Audit Committee. In 2012, Mr. Filipponi served 14 days at

Board and Board committee meetings and six days in other official activities on behalf of the Board, for which he was compensated $28,500.

Adam B. Firestone, Director

Term of Office: Mr. Firestone has served on the Board since 1997. His current term ends in 2017.

During the past five years, Mr. Firestone has been involved in wine grape growing, as well as wine production and marketing. He has also been a practicing attorney. Mr. Firestone serves on the Farm Credit West Corporate Governance Committee and Farm Credit West Audit Committee. Mr. Firestone is president of Grundoon LLC (which produces and markets wine and wine grapes), managing member of Firestone Walker, LLC (a brewer), and president of Pacific Conservation Company, LLC (a land holding company). He is also a managing director at American Physical Security Group, Inc. He is a member of the California Bar Association. In 2012, Mr. Firestone served 15 days at Board and Board committee meetings and one day in other official activities on behalf of the Board, for which he was compensated $26,000.

Craig C. Gnos, Director

Term of Office: Mr. Gnos has served on the Board since 2002. His current term ends in 2014.

During the past five years, Mr. Gnos has been involved in the production of alfalfa, corn, cucumbers, tomatoes, squash, sunflowers, watermelons, and wheat at Batavia and E&H Farms. Mr. Gnos serves on the Solano County FSA Committee. Mr. Gnos serves on the Farm Credit West Human Capital and Compensation/Evaluation Committee. In 2012, Mr. Gnos served 15 days at Board and Board committee meetings and eight days in other official activities on behalf of the Board, for which he was compensated $30,500.

Robert N. Hansen, Director

Term of Office: Mr. Hansen has served on the Board since 1999. His current term ends in 2016.

During the past five years, Mr. Hansen has been a partner in Hansen Farms (which raises irrigated field crops) and 3-H Cattle Company (a custom cattle-raising feedlot operation). Mr. Hansen serves on the Farm Credit West Audit Committee. He also serves as a member of the CoBank District Farm Credit Council and CoBank Nominating Committee. He is chairman of the Duncan Reclamation District (which reclaims soil in the Corcoran area) and the Bayou Vista Ditch Company (an irrigation system operator) as well as chairing the consolidated finance committee of Hanford Community Medical Center and Central Valley General Hospital. Mr. Hansen is also a director of the Hanford Community Medical Center (a health care provider). In 2012, Mr. Hansen served 16 days at Board and Board



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committee meetings and 13 days in other official activities on behalf of the Board, for which he was compensated $33,250.

Thomas R. Heenan, Director

Term of Office: Mr. Heenan has served on the Board since 1990. His current term ends in 2015.

During the past five years, Mr. Heenan has been a partner in Heenan Ranch growing peaches, prunes, walnuts and kiwi fruit. Mr. Heenan serves on the Farm Credit West Audit Committee. In 2012, Mr. Heenan served 16 days at Board and Board committee meetings and 11 days in other official activities on behalf of the Board, for which he was compensated $32,250.

Barry T. Powell, Appointed Director

Term of Office: Mr. Powell has served on the Board since 2007. His current term ends in 2017.

During the past five years, Mr. Powell has been a financial consultant within the agricultural sector and also the executive vice president and chief financial officer of Calamco, a wholesale fertilizer supply cooperative. Mr. Powell is presently self-employed as a financial and operational consultant within agriculture and non-profit. He is past chairman for Western Plant Health Assoc., a lobbying and trade association. Mr. Powell serves as chairman of the Farm Credit West Audit Committee and also serves on the Corporate Governance Committee. The Board has determined that he is an audit committee financial expert. In 2012, Mr. Powell served 18 days at Board and Board committee meetings and 11 days in other official activities on behalf of the Board, for which he was compensated $36,000.

Sureena B. Thiara, Director

Term of Office: Mrs. Thiara has served on the Board since 2005. Her current term ends in 2016.

During the past five years, Mrs. Thiara has been a partner in Far Horizon Insurance and Real Estate. She leases the family farm of 145 acres to farm prunes and walnuts and has been a crop insurance agent for over 15 years. Mrs. Thiara serves on the Farm Credit West Audit Committee. The Board has determined that she is an audit committee financial expert. In 2012, Mrs. Thiara served 16 days at Board and Board committee meetings and three days in other official activities on behalf of the Board, for which she was compensated $28,000.

Cornelius (Case) Van Wingerden, Director

Term of Office: Mr. Van Wingerden has served on the Board since 1987. His current term ends in 2013.

During the past five years, Mr. Van Wingerden has been involved in the production, shipping, and marketing of fresh cut flower bouquets, potted orchid plants and living lettuce and herbs to supermarkets nationwide. Mr. Van Wingerden serves as chairman of the Farm Credit West Human Capital and Compensation/Evaluation Committee and also serves on

the Corporate Governance Committee. He is a director of Westland Floral Company (produces fresh cut flowers and potted orchid plants), GroLink Plant Company, Inc./Athena Brazil (propagates vegetative cuttings), and Floral Ambiance, Inc. (ships consumer-direct floral gifts), and Westland Produce, Inc. (produces living lettuce and herbs). In 2012, Mr. Van Wingerden served 15 days at Board and Board com-mittee meetings and seven days in other official activities on behalf of the Board, for which he was compensated $31,750.

Director Compensation, Travel, Subsistence, and Other Related Expenses

During 2012, each Farm Credit West director received an annual retainer: the Board chairman was paid $28,000, the Board vice chairman and Board committee chairmen were paid $22,000 each, and all other directors were paid $19,000 each. In addition, directors received daily honorarium of $500 for each day they attended an official Board function in person, and $250 for attending an official Board function via conference call.

Total compensation paid all directors by Farm Credit West for 2012, as described above, amounted to $473,250.

Beginning in 2013, the Board adopted a director compensation policy tied to FCA’s “Maximum Bank Director Compensation” informational memo. The new policy sets annual director retainers as a percentage of the FCA maxi-mum and eliminates daily honoraria. The Board chairman compensation will be 85% of the FCA maximum, Board vice chairman and Board committee chairmen compensation will be 75% of the maximum; Board committee members will receive 65%, and all other directors will receive 50% of the FCA maximum. The FCA issues the informational memo during the first quarter of each year. For 2012, the Maximum Bank Director Compensation was $54,467.

Directors, senior officers, and other staff are reimbursed reasonable costs of essential travel, subsistence, and other related expenses. A copy of the policy authorizing such reimbursements is available to shareholders upon request. The total amount of reimbursements to directors for travel, subsistence, and other related expenses totaled $75,000, $57,000, and $80,000 in 2012, 2011, and 2010, respectively.

Senior Officers

Farm Credit regulations also require the disclosure of the business experience for the last five years for each senior officer. Required senior officer compensation information is included in Farm Credit West’s Annual Meeting Information Statement, which is available for public inspection at the Association’s offices.

Mark D. Littlefield, President and Chief Executive Officer

Mr. Littlefield has served in his current position since January 2011. Prior to that, he served as an executive vice president



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(and senior vice president) of Farm Credit West since its founding in 2001. He was senior vice president and vice president of Central Coast Farm Credit, ACA and its predecessors from 1986 until the merger that formed Farm Credit West. He has been employed in the Farm Credit System since 1984. In addition to his employment with Farm Credit West and its predecessor organizations, he has served as assistant vice president for Southern California PCA. Mr. Littlefield is a member of Farm Credit West’s Corporate Governance Committee. He serves on the board for Financial Partners, Inc. (Farm Credit technology service provider) and also serves on their audit committee.

John C. Boyes, Executive Vice President – Risk Management & Chief Risk Officer

Mr. Boyes has served in his current position since September 2010. Prior to that, he served as executive vice president (and senior vice president) of credit for Farm Credit West and Central Coast Farm Credit, ACA and its predecessors from 1988 until the merger that formed Farm Credit West in 2001. He has been employed in the Farm Credit System since 1976. In addition to his employment with Farm Credit West and its predecessor organizations, he has served as president for each of the Bozeman (Montana) and Livermore (California) PCAs as well as senior vice president of the Sierra-Bay (California) PCA.

William M. Noland, Executive Vice President – Credit Operations & Chief Credit Officer

Mr. Noland has served in his current position since January 2011. Prior to that, he served as senior vice president-Credit Operations since the founding of Farm Credit West in 2001; and he was vice president of Valley AgCredit, ACA and its predecessors from 1981 until the merger that formed Farm Credit West. Mr. Noland serves on the Agribusiness Advisory Council for California Polytechnic State University, San Luis Obispo.

Chris N. Brumfield, Executive Vice President – General Counsel & Corporate Secretary

Mr. Brumfield has served in his current position since January 2011. Prior to that, he served as senior vice presi-dent-General Counsel since the founding of Farm Credit West in 2001. Mr. Brumfield has been employed as legal counsel to Farm Credit West and its predecessor organiza-tions and the Farm Credit Banks of Spokane (Washington) since 1988, except for an 18-month period from 1991 until 1993 during which he practiced law in San Luis Obispo.

Christopher J. Doherty, Executive Vice President – Fiscal Operations & Chief Financial Officer

Mr. Doherty has served in his current position since January 2012. Prior to that, he served as senior vice president and chief financial officer since November 2008. From 2006 to 2008, he served as vice president and chief financial officer of Cal/West Seeds, an agricultural processing and marketing

cooperative. During 2005, he provided consulting services to Farm Credit System entities, and from 2003 to 2004, was senior vice president and chief financial officer of AgCredit Financial, ACA. Mr. Doherty also was employed at Western Farm Credit Bank from 1987 to 2002. Mr. Doherty is a Certified Public Accountant (CPA).

Ernest M. Hodges, Executive Vice President – Administrative Operations & Chief Information Officer

Mr. Hodges has served in his current position since May 2008. Prior to that, he served as president and chief execu-tive officer of Sacramento Valley Farm Credit, ACA since August 1993. Mr. Hodges has been employed in manage-ment positions in the Farm Credit System since 1973, except for a 24 month period from 1976 to 1978. Mr. Hodges served on the Federal Agricultural Mortgage Corporation (Farmer Mac) Board of Directors from 2005 to 2012. Mr. Hodges has also served since 1999 as a trustee of Woodland Memorial Hospital Foundation, which provides financial support to Woodland Healthcare. He has served on the California State Fair Agricultural Advisory Council since 2009.

Chris Roche, Senior Vice President – Human Resources

Ms. Roche has served in her current position since May 2011. From 2006 to 2011, she was a human resources manager for Aerojet Inc., an aerospace and defense contractor. She was a consultant with Resources Global Professional, Inc. from 2003 to 2006 providing expertise in the areas of accounting and human resources. Ms. Roche also was employed at AgAmerica/Western Farm Credit Bank from 1993 to 2002 as the director-human resources.

Douglas M. Berg, Regional Vice President – Credit Operations

Mr. Berg has served in his current position since March 2011. Prior to that, Mr. Berg served as senior vice president, branch manager of the Tulare Dairy Center office from its inception in 2003. Prior to that, he was branch manager of the Tipton office and subsequent Tulare office of Valley AgCredit, ACA from 1998 until the merger that formed Farm Credit West in 2001. He was also assistant branch manager of the Tipton office for Valley AgCredit, ACA and its predecessors from 1985 to 1998. Mr. Berg has been employed in the Farm Credit System since 1980.

Dan Clawson, Regional Vice President – Credit Operations

Mr. Clawson has served in his current position since April 2010. From 2008 to 2010, Mr. Clawson served as senior vice president of credit operations. Prior to that, he served as the chief credit officer for Sacramento Valley Farm Credit, ACA since May of 2001. He started his employment with the Farm Credit System in 1986. Mr. Clawson has served as a director for the Yolo Land Trust since 2007.



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James Neeley, Regional Vice President-Strategy & Enterprise Risk Management

Mr. Neeley has served in his current position since January 2012. Prior to that, he was the senior vice president of risk management/capital markets for Farm Credit West and vice president – Visalia branch manager for Valley AgCredit, ACA and its predecessors from 1984 until the merger that formed Farm Credit West in 2001. He has been employed in the Farm Credit System since 1978.

Melanie Johnson, Senior Vice President – Director of Internal Audit

Ms. Johnson has served in her current position since January 2012. Previously, she served as vice president – assistant director of internal audit from September 2009. Prior to that, she was a senior manager for PricewaterhouseCoopers. She worked for PricewaterhouseCoopers for 13 years from 1996 to 2009. Ms. Johnson is a Certified Internal Auditor (CIA) and a Certified Public Accountant (CPA).

Transactions with Senior Officers and Directors

Farm Credit West’s policies on loans to and transactions with its full-time officers and directors, required to be disclosed in this section, are incorporated herein by reference from Note 13 to the financial statements included in this Annual Report. At December 31, 2012, no loans to Farm Credit West directors or full-time officers, CoBank directors or full-time officers, their immediate families, or affiliated organizations involved more than a normal risk of collectability.

Director and Officer Preferred Stock Ownership

The following table shows information related to the preferred stock holdings of Association directors.

For the year ended December 31, 2012 Year-end (in thousands) Balance Issued Retired

Robert Amarel, Jr. 105$ —$ —$ Gregory O. Dias, Jr. 93 42 — Douglas C. Filipponi 1,888 — — Robert N. Hansen 598 — (20) Thomas R. Heenan 369 25 —

Total 3,053$ 67$ (20)$

Preferred Stock

Farm Credit West has a comprehensive policy dealing with the equitable issuance and retirement of its class H preferred stock. The average preferred stock dividend rate for 2012 was 2.00% for all preferred stockholders. Farm Credit West preferred stock policy prohibits ownership of preferred stock by Association employees.

Involvement of Directors and Officers in Certain Legal Proceedings

There were no matters which came to the attention of management or the Board of Directors regarding involvement of current directors or full-time officers in specified legal proceedings which are required to be disclosed in this section.

Relationship with CoBank

The financial condition and results of operations of CoBank materially affect stockholder investments in Farm Credit West. Copies of the CoBank Annual Report and copies of CoBank’s most recent quarterly financial report are available from Farm Credit West free of charge.

Farm Credit West’s statutory obligation to borrow from CoBank is discussed in Note 8 to the financial statements included in this Annual Report.

Farm Credit West’s requirement to invest in CoBank capital is discussed in Note 5 to the financial statements included in this Annual Report.

CoBank’s role in mitigating Farm Credit West’s exposure to interest rate risk is described in the Liquidity and Funding Sources section of “Management’s Discussion and Analysis” included in this Annual Report.

Relationship with Independent Auditors

There were no changes in independent auditors and no material disagreements with the independent auditors on any matters of accounting principle or financial statement disclosures during 2012. In 2012, we paid $154,000 in audit fees to our independent auditors, PricewaterhouseCoopers LLP.

Financial Statements

The financial statements, together with the report thereon of PricewaterhouseCoopers LLP dated March 7, 2013, as well as “Management’s Discussion and Analysis” in this Annual Report, are incorporated herein by reference.

Description of Property

The table on the following page provides certain information regarding office properties owned and/or occupied by Farm Credit West, ACA (Farm Credit West) at December 31, 2012. The Roseville, Tulare, and Yuba City offices are leased. All other properties listed are owned by Farm Credit West. Farm Credit West also owns some commercial real estate parcels adjacent to the Woodland, Kern County and Templeton offices, all of which are held as investments in land. In 2012, we purchased a parcel in Tulare on which we intend to build a new regional office. The Tulare land is included in premises and equipment.




Facility Description Street/Mailing Address Contact Information Corporate Headquarters 1478 Stone Point Drive, Suite 450 Voice: 916.780.1166 Roseville, CA 95661 Facsimile: 916.780.1820 E-mail: [email protected] Web Site: www.farmcreditwest.com Carpinteria Office 1135 Eugenia Place, Suite A, 93013 Voice: 805.684.8771 Post Office Box 130 Facsimile: 805.684.0159 Carpinteria, CA 93014 E-mail: [email protected] Dinuba Office 531 North Alta Avenue Voice: 559.591.9378 Post Office Box 904 Facsimile: 559.591.2289 Dinuba, CA 93618 E-mail: [email protected] Hanford Office 1111 West Lacey Boulevard, 93230 Voice: 559.584.2681 Post Office Box 1208 Facsimile: 559.584.9075 Hanford, CA 93232 E-mail: [email protected] Kern County Office 19628 Industry Parkway Drive Voice: 661.399.7360 Bakersfield, CA 93308 Facsimile: 661.399.7366 E-mail: [email protected] E-mail: [email protected] Santa Maria Office 1178 Tama Lane Voice: 805.922.7991 Santa Maria, CA 93455 Facsimile: 805.922.5121 E-mail: [email protected] Templeton Office 175 Cow Meadow Place, Paso Robles, CA 93446 Voice: 805.434.3665 Post Office Box 1449 Facsimile: 805.434.3667 Templeton, CA 93465 E-mail: [email protected] E-mail: [email protected] Tulare Dairy Center 304 East Tulare Avenue Voice: 559.688.7844 Tulare, CA 93274 Facsimile: 559.686.5924 E-mail: [email protected] Ventura Office 2031 Knoll Drive, 93003 Voice: 805.477.1020 Post Office Box 6070 Facsimile: 805.650.0622 Ventura, CA 93006 E-mail: [email protected] Visalia Office 3000 and 3010 West Main Street, 93291 Voice: 559.732.4501 Post Office Box 4379 Facsimile: 559.732.2958 Visalia, CA 93279 E-mail: [email protected] Woodland Office 440 Pioneer Avenue Voice: 530.666.3333 Post Office Box 269 Facsimile: 530.662.9034 Woodland, CA 95776 E-mail: [email protected] Yuba City Office 900 Tharp Road, 95993 Voice: 530.671.1420 Post Office Box 552 Facsimile: 530.671.0723 Yuba City, CA 95992 E-mail: [email protected]

farm credit west 2012 annual report

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