BANDERA ELECTRIC COOPERATIVE, INC. BANDERA, TEXAS FINANCIAL STATEMENTS WITH ACCOMPANYING INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

BANDERA, TEXAS FINANCIAL STATEMENTS WITH ACCOMPANYING INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 AND REPORT OF BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. LUBBOCK, TEXAS

BANDERA, TEXAS FINANCIAL STATEMENTS WITH ACCOMPANYING INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 AND REPORT OF

BANDERA, TEXAS FINANCIAL STATEMENTS WITH ACCOMPANYING INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 TABLE OF CONTENTS Statement Identification Page No. Independent Auditors' Report 1 Financial Statements Balance Sheet Exhibit A 3 Statement of Income and Patronage Capital Exhibit B 4 Statement of Cash Flows Exhibit C 5 Notes to Financial Statements 6 Accompanying Information Independent Auditors' Report on Accompanying Information 16 Electric Plant Schedule 1 17 Schedule of Accumulated Provision for Depreciation Schedule 2 18 Other Property and Investments Schedule 3 19 Patronage Capital Schedule 4 20 CFC Mortgage Notes Schedule 5 21 Administrative and General Expenses Schedule 6 22 Compliance Section Letter to Board of Directors Regarding Policies Concerning Audits of CFC Borrowers 23

BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. certified public accountants PHONE: (806) 747-3806 FAX: (806) 747-3815 8215 Nashville Avenue LUBBOCK, TEXAS 79423-1954 INDEPENDENT AUDITORS' REPORT Board of Directors Bandera Electric Cooperative, Inc. Bandera, Texas We have audited the accompanying financial statements of Bandera Electric Cooperative, Inc. (the Cooperative), which comprise the balance sheets as of December 31, 2012 and 2011, and the related statements of income and patronage capital and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these 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 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 these 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the 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 entity'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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. -1-

-2- Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bandera Electric Cooperative, Inc. as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Certified Public Accountants Lubbock, Texas April 1, 2013

-3- BALANCE SHEET DECEMBER 31, 2012 AND 2011 Exhibit A ASSETS December 31, 2012 2011 UTILITY PLANT AT COST Electric Plant in Service $ 196,109,515 $ 181,588,259 Construction Work in Progress 903,008 6,665,203 $ 197,012,523 $ 188,253,462 Less: Accumulated Provision for Depreciation 44,183,617 39,376,094 $ 152,828,906 $ 148,877,368 OTHER PROPERTY AND INVESTMENTS - AT COST OR STATED VALUE Investments in Associated Organizations $ 4,512,160 $ 4,358,082 Other Investments 12,402 16,617 $ 4,524,562 $ 4,374,699 CURRENT ASSETS Cash - General $ 576,564 $ 323,372 Accounts Receivable (Less allowance for uncollectibles of $223,176 in 2012 and $202,306 in 2011) 1,924,687 3,105,108 Accrued Unbilled Revenue 1,253,109 2,009,815 Underbilled Fuel Cost Recovery 179,509 290,424 Materials and Supplies Inventory 86,225 88,931 Other Current and Accrued Assets 344,514 443,543 Total Current Assets $ 4,364,608 $ 6,261,193 DEFERRED CHARGES $ 684,594 $ 316,753 TOTAL ASSETS $ 162,402,670 $ 159,830,013 EQUITIES AND LIABILITIES EQUITIES Memberships $ 546,795 $ 535,920 Patronage Capital 49,574,928 49,875,518 Other Equities 989,850 882,444 Accumulated Other Comprehensive Loss (1,054,806) (249,300) $ 50,056,767 $ 51,044,582 LONG-TERM DEBT CFC Mortgage Notes Less Current Maturities $ 88,255,159 $ 84,777,987 ACCUMULATED PROVISION FOR PENSIONS AND BENEFITS $ 7,033,123 $ 5,943,700 CURRENT LIABILITIES Current Maturities of Long-Term Debt $ 3,851,088 $ 3,158,995 Advances on Line of Credit - CFC 1,135,000 122,012 Accounts Payable 4,087,443 4,951,575 Consumer Deposits and Prepayments 542,387 536,977 Accrued Power Cost 799,022 Other Current and Accrued Liabilities 1,161,418 1,095,453 Total Current Liabilities $ 10,777,336 $ 10,664,034 DEFERRED CREDITS $ 6,280,285 $ 7,399,710 TOTAL EQUITIES AND LIABILITIES $ 162,402,670 $ 159,830,013 See accompanying notes to financial statements.

-4- STATEMENT OF INCOME AND PATRONAGE CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 Exhibit B December 31, 2012 2011 Increase Amount % Amount % (Decrease) OPERATING REVENUES Residential $ 41,073,155 69.0 $ 43,077,139 70.2 $ (2,003,984) Irrigation 116,528 0.2 115,270 0.2 1,258 Commercial and Industrial 14,826,169 24.9 14,794,314 24.1 31,855 Public Street and Highway Lighting 37,234 0.1 40,113 0.1 (2,879) Unbilled Revenue (756,707) (1.3) 117,514 0.2 (874,221) Other Operating Revenues 4,306,494 7.2 3,209,158 5.2 1,097,336 Total Operating Revenues $ 59,602,873 100.0 $ 61,353,508 100.0 $ (1,750,635) OPERATING EXPENSES Purchased Power $ 36,442,786 61.1 $ 38,721,656 63.1 $ (2,278,870) Transmission - Operation 421,426 0.7 403,658 0.7 17,768 Distribution - Operation 3,698,404 6.2 2,962,991 4.8 735,413 Distribution - Maintenance 2,104,806 3.5 1,925,111 3.1 179,695 Consumer Accounts 1,619,304 2.7 1,553,714 2.5 65,590 Customer Service and Information 245,576 0.4 297,162 0.5 (51,586) Administrative and General 3,978,448 6.7 3,816,891 6.2 161,557 Depreciation and Amortization 6,325,163 10.6 5,380,835 8.8 944,328 Other Interest 727 0.0 159 0.0 568 Miscellaneous Income Deductions 240,495 0.4 174,431 0.3 66,064 Total Operating Expenses $ 55,077,135 92.4 $ 55,236,608 90.0 $ (159,473) OPERATING MARGINS - Before Fixed Charges $ 4,525,738 7.6 $ 6,116,900 10.0 $ (1,591,162) FIXED CHARGES Interest on Long-Term Debt $ 3,488,081 5.9 $ 3,418,429 5.6 $ 69,652 Amortization of Gain on Reacquired Debt (241,997) (0.4) (244,684) (0.4) 2,687 $ 3,246,084 5.4 $ 3,173,745 5.2 $ 72,339 OPERATING MARGINS - After Fixed Charges $ 1,279,654 2.2 $ 2,943,155 4.8 $ (1,663,501) Capital Credits 410,706 0.7 472,828 0.8 (62,122) NET OPERATING MARGINS $ 1,690,360 2.9 $ 3,415,983 5.6 $ (1,725,623) NON-OPERATING MARGINS Interest Income $ 70,538 0.1 $ 70,526 0.1 $ 12 Other Non-operating Income 20,531 0.0 53,984 0.1 (33,453) $ 91,069 0.1 $ 124,510 0.2 $ (33,441) NET MARGINS $ 1,781,429 3.0 $ 3,540,493 5.8 $ (1,759,064) OTHER COMPREHENSIVE INCOME (LOSS) Adjustment for Application of Post-retirement Benefit Accounting (805,506) 62,600 COMPREHENSIVE INCOME $ 975,923 $ 3,603,093 Adjustment for Application of Post-retirement Benefit Accounting 805,506 (62,600) NET MARGINS $ 1,781,429 $ 3,540,493 PATRONAGE CAPITAL - BEGINNING OF YEAR 49,875,518 47,435,344 Patronage Capital Retired (2,082,019) (1,100,319) PATRONAGE CAPITAL - END OF YEAR $ 49,574,928 $ 49,875,518 See accompanying notes to financial statements.

-5- STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 Exhibit C December 31, 2012 2011 CASH FLOWS FROM OPERATING ACTIVITIES Net Margins $ 1,781,429 $ 3,540,493 Adjustments to Reconcile Net Margins to Net Cash Provided by Operating Activities Depreciation and Amortization 6,642,531 5,662,872 Amortized Gain on Retirement of RUS Debt (241,997) (244,684) Capital Credits - Non Cash (410,706) (472,828) Accumulated Provision for Pensions and Benefits Accrual 649,902 649,901 Deferred Charges (367,841) 93,863 Deferred Credits (877,428) (564,913) Accounts Receivable 1,937,127 (174,763) Power Cost Adjustments 75,911 (133,237) Inventories and Prepaid Expenses 101,735 (78,409) Payables and Accrued Expenses (1,556,776) 419,117 Net Cash Provided by Operating Activities $ 7,733,887 $ 8,697,412 CASH FLOWS FROM INVESTING ACTIVITIES Additions to Utility Plant $ (9,979,096) $ (10,664,434) Plant Removal Costs (in Excess of) Salvage and Other Credits (614,973) (372,483) Other Property and Investments 260,843 353,217 Net Cash Used in Investing Activities $ (10,333,226) $ (10,683,700) CASH FLOWS FROM FINANCING ACTIVITIES Short-Term Lines of Credit Activity - Net $ 1,012,988 $ (852,988) Payments on Long-Term Debt to CFC (3,330,735) (2,667,443) Advances on CFC Long-Term Debt 7,500,000 7,000,000 Payments on Accumulated Provision for Pensions and Benefits (365,984) (335,767) Other Equities 107,406 145,949 Retirement of Patronage Capital (2,082,019) (1,100,319) Increase in Memberships - Net 10,875 9,050 Net Cash Provided by Financing Activities $ 2,852,531 $ 2,198,482 INCREASE IN CASH AND CASH EQUIVALENTS $ 253,192 $ 212,194 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 323,372 111,178 CASH AND CASH EQUIVALENTS - END OF YEAR $ 576,564 $ 323,372 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash Paid During the Year for: Interest on Long-Term Debt $ 3,629,261 $ 3,406,781 Income Taxes $ 0 $ 0 The adjustment for the application of post-retirement benefit accounting increased (decreased) the accrued postretirement benefit liability by $805,506 and ($62,600), and changed equities by the same amount for 2012 and 2011, respectively. See accompanying notes to financial statements.

-6- NOTES TO FINANCIAL STATEMENTS 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Bandera Electric Cooperative, Inc. (the Cooperative) is a non-profit company organized to provide electric service at the retail level to primarily residential and commercial accounts in a designated service area. Power delivered at retail is purchased wholesale from the Lower Colorado River Authority and other suppliers. Any revenues earned in excess of costs incurred are allocated to members of the Cooperative and are reflected as patronage capital in the balance sheet. System of Accounts The accounting records of the Cooperative are maintained in accordance with the Uniform System of Accounts as prescribed by the Federal Energy Regulatory Commission for Class A and B electric utilities modified for electric borrowers of the National Rural Utilities Cooperative Finance Corporation (CFC). Electric Plant, Maintenance, and Depreciation Electric plant is stated at the original cost of construction which includes the cost of contracted services, direct labor, materials, and overhead items. Contributions from others toward the construction of electric plant are credited to the applicable plant accounts. When property which represents a retirement unit is replaced or removed, the average cost of such property as determined from the continuing property records is credited to electric plant and such cost, together with cost of removal less salvage, is charged to the accumulated provision for depreciation. Maintenance and repairs, including the renewal of minor items of plant not comprising a retirement unit, are charged to the appropriate maintenance accounts, except that repairs of transportation and service equipment are charged to clearing accounts and redistributed to operating expense and other accounts. Cash and Cash Equivalents For purposes of the statement of cash flows, cash and temporary cash investments are considered cash and cash equivalents. Accounts Receivable In the normal course of business the Cooperative recognizes accounts receivable for energy delivered and billed. The Cooperative allows 16 days from the date of the bill for payment to be received or the service is considered delinquent. Delinquent accounts receive a penalty of five percent. If no payment is received within 24 days or a deferred payment agreement is not in place, the account is subject to disconnect. The Cooperative provides an allowance for doubtful accounts to recognize the portion of receivables considered uncollectible. The Cooperative accrues amounts monthly to the allowance. The allowance is estimated based on historical trends, aging of receivables and review of potential bad debts. The Board of Directors reviews delinquent accounts annually and charges off accounts over two years old.

-7- NOTES TO FINANCIAL STATEMENTS Inventories Materials and supplies inventories are valued at average unit cost. Electric Revenues Certain aspects of the Cooperative s operations are under the jurisdiction of the Public Utility Commission of Texas; however, the Cooperative is no longer regulated for ratemaking purposes. The Cooperative records electric revenues as billed to customers on a monthly basis. Revenue is also accrued for power delivered but not billed at the end of each month. The Cooperative's tariffs for electric service include power cost adjustment clauses under which billings to customers are adjusted to reflect changes in the cost of purchased power. In order to match power cost and related revenues, underbilled power cost to be billed to consumers in subsequent periods is recognized as a current asset - "Underbilled Fuel Cost Adjustment" and as an increase of classified operating revenues on the statement of income and patronage capital. Also, overbilled power cost to be credited to consumers in subsequent periods is recognized as a current liability - "Overbilled Fuel Cost Adjustment" and as a reduction of classified operating revenues on the statement of income and patronage capital. The Cooperative had under collected power cost of $179,509 and $290,424 at December 31, 2012 and 2011, respectively. Income Tax Status The Cooperative is an exempt organization for federal income tax purposes under Section 501(c)(12) of the Internal Revenue Code. The Cooperative has adopted the uncertain tax positions provisions of accounting principles generally accepted in the United States of America. The primary tax position of the Cooperative is its filing status as a tax exempt entity. The Cooperative determined that it is more likely than not that their tax positions will be sustained upon examination by the Internal Revenue Service (IRS), or other State taxing authority and that all tax benefits are likely to be realized upon settlement with taxing authorities. The Cooperative files income tax returns in the U.S. federal jurisdiction. The Cooperative is no longer subject to U.S. federal and state income tax examinations by federal taxing authorities for years before 2009. The Cooperative recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. There were no penalties or interest recognized during the years ended December 31, 2012 and 2011. Group Concentration of Credit Risk The Cooperative's headquarters facility is located in Bandera, Texas. The service area includes members located in substantially all or parts of a seven county area surrounding the City of Bandera. The Cooperative records a receivable for electric revenues as billed on a monthly basis. The Cooperative may require a deposit from new members upon connection which is applied to unpaid bills and fees in the event of default. The deposit accrues interest annually and is returned along with accrued interest after one year of prompt payments. As of December 31, 2012 and 2011, deposits on hand totaled $542,387 and $536,977, respectively.

-8- NOTES TO FINANCIAL STATEMENTS The Cooperative maintains its cash balances in institutions insured by the Federal Deposit Insurance Corporation (FDIC). The cash balances exceeded applicable insurance coverages at times during the year. Patronage Capital Certificates Patronage capital from associated organizations is recorded at the stated amount of the certificate. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Assets Pledged All assets are pledged as security for the long-term debt due the National Rural Utilities Cooperative Finance Corporation. 3. Electric Plant The major classes of electric plant are as follows: December 31, 2012 2011 Transmission Plant $ 23,388,427 $ 22,504,704 Distribution Plant 149,850,989 142,922,004 General Plant 22,870,099 16,161,551 Total Electric Plant in Service $ 196,109,515 $ 181,588,259 Construction Work in Progress 903,008 6,665,203 Total Electric Plant $ 197,012,523 $ 188,253,462 Provision for depreciation of electric plant is computed using straight-line rates as follows: Transmission Plant 2.75% Distribution Plant 2.75% General Plant Structures and Improvements 2.00% - 33.30% Office Furniture and Fixtures 7.00% - 33.30% Transportation Equipment 6.70% - 33.30% Store Equipment 20.00% Power Operated Equipment 5.00% - 33.30% Communications Equipment 5.40% - 33.30% Miscellaneous Equipment 6.00% - 33.30% Tools, Shop, and Garage Equipment 6.00% - 33.30% Laboratory Equipment 6.00% - 33.30%

-9- NOTES TO FINANCIAL STATEMENTS Depreciation and amortization for the years ended December 31, 2012 and 2011, was $6,642,531 and $5,662,872, respectively, of which $6,325,163 and $5,380,835, was charged to depreciation expense and $317,368 and $282,037, was allocated to other accounts. 4. Investments in Associated Organizations Investments in associated organizations consisted of: December 31, 2012 2011 CFC Capital Term Certificates $ 1,675,858 $ 1,703,025 Patronage Capital 1,456,817 1,318,122 Member Capital Securities 500,000 500,000 Hill Country Telephone Patronage Capital 73,553 74,093 Texas Electric Cooperatives, Inc. Patronage Capital 760,920 716,934 Other 45,012 45,908 Total $ 4,512,160 $ 4,358,082 5. Inventories Materials and supplies inventories consisted of: December 31, 2012 2011 Construction Materials and Supplies $ 39,676 $ 39,676 Resale Material 46,549 49,255 Total $ 86,225 $ 88,931 Texas Electric Cooperative (TEC) sells material to the Cooperative as needed, thus reducing the need to carry large inventory balances. The Cooperative is also currently represented on the Board of TEC. 6. Deferred Charges Deferred charges included the following: December 31, 2012 2011 Work Plans $ 397,125 $ 56,441 Automated Staking 78,065 118,794 Software Training 99,762 141,043 Other 109,642 475 Total $ 684,594 $ 316,753

-10- NOTES TO FINANCIAL STATEMENTS 7. Return of Capital The mortgage agreements contain provisions that must be met for the Cooperative to make patronage capital retirements. These provisions include minimum equity, debt service, and earnings ratios. The Cooperative is in compliance with these provisions at December 31, 2012 and 2011. Patronage capital totaling $2,082,019 and $1,100,319 was retired during 2012 and 2011, respectively. 8. Patronage Capital December 31, 2012 2011 Assigned $ 47,793,499 $ 46,335,025 Assignable 1,780,829 3,540,493 Total $ 49,574,328 $ 49,875,518 9. Other Equities December 31, 2012 2011 Capital Credits Payable - Under $5 $ 20,643 $ 21,412 Retired Capital Credits - Gain - Estates 969,207 861,032 Total $ 989,850 $ 882,444 10. Mortgage Notes CFC and Notes Under CFC Management Following is a summary of long-term debt due CFC and those under CFC management but owned by Farmer Mac and maturing at various times from 2015 to 2047: December 31, 2012 2011 Variable Rate Notes - Currently 1.31% $ 21,831,890 $ 21,652,818 Variable Rate Notes - Currently 3.20% 1,300,000 Fixed Rate Notes - 2.95% to 7.19% 70,274,357 64,984,164 $ 92,106,247 $ 87,936,982 Less: Current Maturities 3,851,088 3,158,995 Total $ 88,255,159 $ 84,777,987

-11- NOTES TO FINANCIAL STATEMENTS Principal and interest installments on the above notes are due quarterly. Annual maturities of longterm debt due CFC for the next five years are as follows: 2013 $ 3,851,088 2014 3,999,695 2015 4,119,203 2016 4,267,597 2017 4,399,883 The Cooperative has $26,080,126 available from unadvanced funds. 11. Short-Term Borrowing The Cooperative has a line of credit at a variable interest rate with CFC not to exceed $20,000,000. The balance outstanding at December 31, 2012 and 2011, was $1,135,000 and $122,012, respectively. Interest paid is capitalized as part of work order capitalization. The Cooperative capitalized $134,939 and $215,747 for 2012 and 2011, respectively. During the year ended December 31, 2012, the Cooperative obtained a new additional line of credit with Cobank not to exceed $10,000,000. No amounts were drawn on this line during the year. 12. Deferred Credits Deferred credits include the following: December 31, 2012 2011 Refundable Aid to Construction $ 3,899,099 $ 4,243,426 Undeliverable Checks Returned 756,846 199,086 Scholarship Fund 39,433 44,161 Unamortized Gain on Reacquired Debt 1,456,513 1,698,510 LCRA Power Bill Credits 503,087 Other 128,394 711,440 Total $ 6,280,285 $ 7,399,710 The Cooperative realized a gain in 1987 of $8,767,919 from the discount realized on the buyout of long-term debt to RUS. This amount is classified as a deferred credit and will be amortized over the remaining life of the prepaid RUS debt. Amortization for 2012 and 2011 was $241,997 and $244,684, respectively. 13. Litigation and Commitments There was no litigation pending against the Cooperative at December 31, 2012, that could have a material effect on the financial statements.

-12- NOTES TO FINANCIAL STATEMENTS 14. Pension Benefits The National Rural Electric Cooperative Association (NRECA) Retirement Security Plan (RS Plan) is a defined benefit pension plan qualified under Section 401 and tax-exempt under Section 501(a) of the Internal Revenue Code. It is a multiemployer plan under the accounting standards. The plan sponsor s Employer Identification Number is 53-0116145 and the Plan Number is 333. A unique characteristic of a multiemployer plan compared to a single employer plan is that all plan assets are available to pay benefits of any plan participant. Separate asset accounts are not maintained for participating employers. This means that assets contributed by one employer may be used to provide benefits to employees of other participating employers. The Cooperative contributions to the RS Plan in 2012 and in 2011 represented less than 5 percent of the total contributions made to the plan by all participating employers. The Cooperative made contributions to the plan of $830,325 in 2012 and $636,891 in 2011. During 2012, the Cooperative increased their plan multiplier from 1.4 to 1.6. In the RS Plan, a zone status determination is not required, and therefore not determined, under the Pension Protection Act (PPA) of 2006. In addition, the accumulated benefit obligations and plan assets are not determined or allocated separately by individual employer. In total, the Retirement Security Plan was between 65 percent and 80 percent funded at January 1, 2012 and January 1, 2011 based on the PPA funding target and PPA actuarial value of assets on those dates. Because the provisions of the PPA do not apply to the RS Plan, funding improvement plans and surcharges are not applicable. Future contribution requirements are determined each year as part of the actuarial valuation of the plan and may change as a result of plan experience. In addition, the Cooperative provides retirement benefits through a 401k plan that is administered by NRECA SelectRe Pension plan. The Cooperative provides matching funds up to six percent (three percent in 2011) of an employee s salary. The cost of this plan for 2012 and 2011 was $244,269 and $108,193, respectively. 15. Post-retirement Benefits Other Than Pensions Generally Accepted Account Principles in the United States require an employer that sponsors a defined benefit postretirement plan to report the current economic status (the overfunded or underfunded status) of the plan in its balance sheet, to measure the plan assets and plan obligations as of the balance sheet date, and to include enhanced disclosures about the plan. Benefits are paid on behalf of retirees and are a function of medical insurance costs and number of retirees. Benefits paid for the years ended December 31, 2012 and 2011, were $364,783 and $335,767, respectively. The measurement date used for the current valuation is December 31, 2012.

-13- NOTES TO FINANCIAL STATEMENTS Amounts recognized in the Cooperative's financial statements and funded status of the plan are as follows: December 31, 2012 2011 Accumulated Post-retirement Benefit Obligation (APBO) Balance at Beginning of Year $ 5,943,700 $ 5,692,165 Service Cost 310,510 310,510 Interest Cost 276,791 276,791 Adjustment to Net Loss/Gain 868,106 Less Premiums Paid (365,984) (335,766) Net Post-retirement Benefit Obligation at Year End $ 7,033,123 $ 5,943,700 Net Periodic Post-retirement Benefit Cost Includes: Service Cost $ 310,510 $ 310,510 Interest Cost 276,791 276,791 Amortizaton of Gain or Loss Amortization of Transition Obligation 62,600 62,600 Total $ 649,901 $ 649,901 Accumulated Other Comprehensive Loss Actuarial Loss - Beginning of Year $ (249,300) $ (311,900) Transition Obligation Amortization 62,600 62,600 Adjustment to Net Actuarial Loss/Gain (868,106) Actuarial Gain (Loss) Amortization Other Comprehensive Loss $ (1,054,806) $ (249,300) A 10.00% annual increase for medical and a five percent annual increase for dental benefits in per capita costs was assumed for 2012, gradually decreasing to 5.00% by the year 2018. A weighted average discount rate of 4.00% was used to determine the APBO. The Cooperative has not funded any plan assets as of December 31, 2012 or 2011. Estimated future benefit payments for the next five years are as follows: 2013 $ 320,000 2014 370,000 2015 410,000 2016 450,000 2017 430,000 2018-2022 2,750,000

-14- NOTES TO FINANCIAL STATEMENTS 16. Disclosures About Fair Value of Financial Statements Many of the Cooperative s financial instruments lack an available market with similar terms, conditions, and maturities as those reflected in the carrying amount recorded. Accordingly, significant assumptions, estimations, and present value calculations were used for purposes of this disclosure. Estimated Fair Value has been determined by calculating the present value of financial instruments using the best data available. Fair Value for some amounts carried on the financial statements has not been calculated for the following reasons: Patronage Capital from Associated Organizations The right to receive cash is an inherent component of a financial instrument. The Cooperative holds no right to receive cash since any payments are at the discretion of the governing body for the associated organizations. As such, Patronage Capital from Associated Organizations are not considered financial instruments. CFC Capital Term Certificates and Member Capital Securities It is not practicable to estimate fair value for these financial instruments given the lack of a market and their long holding period. Relevant information with respect to these are as follows: Interest Amount Rate Maturity $ 86,668 3.00% 2025 to 2030 56,646 5.00% 2075 168,676 5.00% 2080 136,792 5.00% 2085 241,397 5.00% 2090 985,679 0.00% 2014 to 2044 500,000 7.50% 2044 $ 2,175,858 Cash and Temporary Cash Investments The recorded book value approximates fair value given the short period to maturity. The estimated fair value of the Cooperative s financial instruments is as follows: Long-Term Debt Fixed Rate The fair value of the Cooperative s CFC Fixed Rate long-term debt is calculated by computing the present value of the individual notes to maturity. The discount rate used is the currently available CFC fixed interest rate available for long-term debt repricing at the same maturity as the current debt.

-15- NOTES TO FINANCIAL STATEMENTS Carrying Fair Value Value December 31, 2012: CFC $ 70,274,357 $ 69,706,419 Fair Value Hierarchy The Fair Value Measurements Topic of the FASB Accounting Standards Codification establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Cooperative has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Long-Term Debt valuations are considered Level 2. 17. Subsequent Events Prior to the year ended December 31, 2012, the Cooperative s Board approved new rates expected to be implemented in the Summer/Fall of 2013. These new rates are expected to increase overall revenue annually by approximately $2.5 million based on a test year of 2011. The Cooperative has evaluated subsequent events through April 1, 2013, the date which the financial statements were available to be issued.

ACCOMPANYING INFORMATION

BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. certified public accountants PHONE: (806) 747-3806 FAX: (806) 747-3815 8215 Nashville Avenue LUBBOCK, TEXAS 79423-1954 INDEPENDENT AUDITORS' REPORT ON ACCOMPANYING INFORMATION We have audited the financial statements of Bandera Electric Cooperative, Inc., as of and for the years ended 2012 and 2011, and our report thereon dated April 1, 2013, which expressed an unmodified opinion on those financial statements, appears on page 1. Our audit was conducted for the purpose of forming an opinion on the financial statements taken as a whole. The schedule of electric plant, accumulated provision for depreciation, other property and investments, patronage capital, CFC mortgage notes, and administrative and general expenses, are presented for purposes of additional analysis and are not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. Certified Public Accountants April 1, 2013-16-

-17- ELECTRIC PLANT FOR THE YEAR ENDED DECEMBER 31, 2012 Schedule 1 Balance Balance 1/1/2012 Additions Retirements 12/31/2012 CLASSIFIED ELECTRIC PLANT IN SERVICE Transmission Plant Land and Land Rights $ 51,024 $ $ $ 51,024 Structures and Improvements 172,820 172,820 Station Equipment 8,206,024 958,610 89,472 9,075,162 Poles, Towers, and Fixtures 6,483,996 (795) (19,422) 6,502,623 Overhead Conductors and Devices 7,590,840 (1,234) 2,808 7,586,798 Total $ 22,504,704 $ 956,581 $ 72,858 $ 23,388,427 Distribution Plant Land and Land Rights $ 202,616 $ 1,074 $ $ 203,690 Structures and Improvements 916,416 916,416 Station Equipment 12,418,127 12,418,127 Poles, Towers, and Fixtures 45,615,401 2,077,256 214,244 47,478,413 Overhead Conductors and Devices 42,499,234 3,239,847 161,800 45,577,281 Underground Conductors and Devices 6,295,419 432,053 12,158 6,715,314 Line Transformers 26,510,971 1,735,345 272,536 27,973,780 Services 1,569,457 1,569,457 Meters 5,113,878 279,621 202,151 5,191,348 Installations on Consumer Premises 1,768,920 99,886 73,208 1,795,598 Street Lighting 11,565 11,565 Total $ 142,922,004 $ 7,865,082 $ 936,097 $ 149,850,989 General Plant Land and Land Rights $ 150,217 $ $ $ 150,217 Structures and Improvements 6,886,819 1,322,579 28,232 8,181,166 Office Furniture and Equipment 5,261,572 3,262,169 161,941 8,361,800 Transportation Equipment 1,415,224 634,582 2,049,806 Store Equipment 2,537 2,537 Tools, Shop, and Garage Equipment 136,789 830 137,619 Laboratory Equipment 229,190 24,975 20,907 233,258 Power Operated Equipment 1,722,109 312,550 2,034,659 Communications Equipment 134,092 1,102,594 1,236,686 Miscellaneous Equipment 223,002 259,349 482,351 Total $ 16,161,551 $ 6,919,628 $ 211,080 $ 22,870,099 Total Classified Electric Plant in Service $ 181,588,259 $ 15,741,291 $ 1,220,035 $ 196,109,515 Construction Work in Progress 6,665,203 (5,762,195) 903,008 Total Utility Plant $ 188,253,462 $ 9,979,096 $ 1,220,035 $ 197,012,523

-18- SCHEDULE OF ACCUMULATED PROVISION FOR DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 2012 Schedule 2 Balance Balance 1/1/2012 Accruals Retirements 12/31/2012 Transmission Plant $ 3,485,703 $ 635,166 $ 86,840 $ 4,034,029 Distribution Plant $ 29,850,667 $ 4,281,855 $ 1,575,949 $ 32,556,573 General Plant Structures and Improvements $ 1,300,163 $ 354,620 $ 28,232 $ 1,626,551 Office Furniture and Fixtures 2,409,595 947,400 161,941 3,195,054 Transportation Equipment 940,357 171,723 1,112,080 Store Equipment 2,230 307 2,537 Tools, Shop, and Garage Equipment 115,944 9,275 125,219 Laboratory Equipment 187,098 19,577 20,907 185,768 Power Operated Equipment 853,522 159,113 1,012,635 Communication Equipment 102,575 7,005 109,580 Miscellaneous Equipment 103,245 56,323 159,568 Outage Management Equipment 108,704 167 108,871 Total General Plant $ 6,123,433 $ 1,725,510 $ 211,080 $ 7,637,863 Total Classified Electric Plant in Service $ 39,459,803 $ 6,642,531 $ 1,873,869 $ 44,228,465 Retirement Work in Progress (83,709) (38,861) (44,848) Total $ 39,376,094 $ 6,642,531 $ 1,835,008 $ 44,183,617 (1) (2) (1) Depreciation Charged to Expense $ 6,325,163 Charged to Clearing 317,368 $ 6,642,531 (2) Net Loss on Retirement Original Cost $ 1,220,035 Cost of Removal 627,629 Less: Salvage and Other Credits 12,656 $ 1,835,008

-19- OTHER PROPERTY AND INVESTMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 Schedule 3 December 31, 2012 2011 INVESTMENTS IN ASSOCIATED ORGANIZATIONS Memberships Associated Organizations $ 2,760 $ 2,760 Patronage Capital NRUCFC 1,456,817 1,318,122 NRTC 40,051 41,431 Texas Electric Cooperatives, Inc. 760,920 716,934 Guadalupe Valley 2,201 1,717 Hill Country Telephone 73,553 74,093 Capital Term Certificates CFC 1,675,858 1,703,025 Member Capital Securities CFC 500,000 500,000 Total $ 4,512,160 $ 4,358,082

-20- PATRONAGE CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2012 Schedule 4 Calendar Year Assignable Assigned Balance 1985 $ $ 1,246,168 $ 1,246,168 1986 1,223,972 1,223,972 1987 1,277,779 1,277,779 1988 1,146,540 1,146,540 1989 1,116,217 1,116,217 1990 932,707 932,707 1991 1,292,020 1,292,020 1992 1,504,440 1,504,440 1993 1,924,961 1,924,961 1994 1,413,176 1,413,176 1995 1,593,866 1,593,866 1996 1,583,682 1,583,682 1997 1,452,453 1,452,453 1998 1,334,259 1,334,259 1999 1,074,546 1,074,546 2000 825,873 825,873 2001 4,087,799 4,087,799 2002 3,053,197 3,053,197 2003 2,912,127 2,912,127 2004 4,088,299 4,088,299 2005 2,172,867 2,172,867 2006 2,097,766 2,097,766 2007 2,151,525 2,151,525 2008 1,604,167 1,604,167 2010 1,334,308 1,334,308 2011 3,348,785 3,348,785 2012 1,781,429 1,781,429 $ 1,781,429 $ 47,793,499 $ 49,574,928

-21- CFC MORTGAGE NOTES DECEMBER 31, 2012 Schedule 5 DIRECT LOANS Note Maturity Interest Principal Amount Principal Net Number Date Rate Amount Unadvanced Repayments Obligation 9003001 3/1/2015 6.04% $ 675,000 $ $ 574,638 $ 100,362 9006001 6/1/2017 6.09% 1,011,000 718,100 292,900 9007001 12/1/2018 6.19% 1,010,000 669,678 340,322 9008001 9/1/2021 6.28% 3,290,323 1,720,210 1,570,113 9013001 11/30/2018 6.19% 213,340 123,716 89,624 9013002 11/30/2018 6.19% 1,786,660 1,035,639 751,021 9014001 2/29/2028 7.19% 3,000,000 1,167,594 1,832,406 9015001 11/30/2018 2.95% 3,000,000 1,804,651 1,195,349 9017001 2/28/2030 7.19% 3,000,000 889,817 2,110,183 9018001 2/28/2030 7.19% 3,000,000 889,817 2,110,183 9019001 8/31/2021 3.90% 3,000,000 1,360,103 1,639,897 9022001 11/30/2023 5.20% 3,000,000 1,029,015 1,970,985 9023001 11/30/2023 5.20% 1,986,530 672,540 1,313,990 9023002 5/31/2024 5.25% 1,013,470 331,220 682,250 9024001 5/31/2024 5.25% 1,756,545 527,680 1,228,865 9024002 5/31/2030 6.30% 1,243,455 230,517 1,012,938 9025001 8/31/2024 4.25% 1,939,410 592,068 1,347,342 9025002 5/31/2030 6.30% 1,060,590 185,626 874,964 9026001 2/28/2034 3.65% 1,171,600 398,158 773,442 9026002 2/28/2034 6.25% 1,285,330 298,014 987,316 9026003 5/31/2030 6.30% 543,070 120,592 422,478 9027001 2/28/2034 6.65% 1,240,510 185,886 1,054,624 9027002 11/30/2024 3.65% 1,249,690 370,473 879,217 9027003 5/31/2030 6.30% 509,800 87,321 422,479 9028001 5/31/2030 6.30% 1,106,870 171,653 935,217 9028002 5/31/2030 6.20% 1,893,130 296,829 1,596,301 9029001 8/31/2035 6.20% 2,165,000 289,043 1,875,957 9029002 11/30/2036 3.75% 835,000 65,829 769,171 9032001 11/30/2036 4.20% 915,000 71,167 843,833 9032002 11/30/2036 4.20% 1,750,000 128,922 1,621,078 9032003 11/30/2036 7.00% 1,750,000 124,705 1,625,295 9032004 11/30/2036 7.00% 1,750,000 124,705 1,625,295 9032005 11/30/2037 6.20% 2,000,000 129,649 1,870,351 9032006 11/30/2037 6.40% 3,000,000 188,165 2,811,835 9032007 11/30/2037 6.45% 3,000,000 186,613 2,813,387 9032008 11/30/2043 3.15% 2,338,318 130,869 2,207,449 9032009 11/30/2043 4.20% 2,283,448 110,706 2,172,742 9032010 11/30/2043 3.40% 1,213,234 59,535 1,153,699 9033001 11/30/2043 3.40% 528,448 25,931 502,517 9033002 11/30/2043 4.10% 136,552 7,595 128,957 9033003 11/30/2039 3.90% 3,000,000 151,147 2,848,853 9033004 11/30/2039 3.25% 3,000,000 160,223 2,839,777 9033005 11/30/2039 3.90% 122,431 6,168 116,263 9033006 11/30/2039 3.90% 1,877,569 94,597 1,782,972 9033008 11/30/2041 4.40% 2,850,000 35,532 2,814,468 9033009 11/30/2041 4.60% 2,850,000 34,310 2,815,690 9033010 11/30/2041 * 3.20% 380,126 380,126 9036001 11/30/2041 * 3.20% 919,874 919,874 9036002 11/30/2042 3.30% 1,500,000 1,500,000 9036003 11/30/2042 4.30% 3,000,000 3,000,000 9036004 11/30/2042 4.40% 3,000,000 3,000,000 9036 12/21/2050 1,080,126 1,080,126 9037 03/16/2051 25,000,000 25,000,000 Total CFC - Direct $ 116,231,449 $ 26,080,126 $ 19,876,966 $ 70,274,357 LOANS UNDER MANAGEMENT Note Maturity Interest Principal Amount Principal Net Number Date Rate Amount Unadvanced Repayments Obligation FMD001 2/1/2025 * 1.31% $ 6,245,126 $ $ 956,639 $ 5,288,487 FMD001 9/1/2025 * 1.31% 11,250,000 11,250,000 FMD001 9/1/2025 * 1.31% 5,004,874 260,999 4,743,875 FMD001 9/1/2025 * 1.31% 2,812,500 187,618 2,624,882 FMD001 9/1/2025 * 1.31% 2,812,500 187,618 2,624,882 FMD001 9/1/2025 * 1.31% 2,812,500 187,618 2,624,882 FMD001 9/1/2025 * 1.31% 2,812,500 187,618 2,624,882 FMD001 3/1/2042 * 1.31% 1,300,000 1,300,000 Total CFC - Loans Under Management $ 35,050,000 $ 0 $ 13,218,110 $ 21,831,890 * Variable Interest Rate

-22- ADMINISTRATIVE AND GENERAL EXPENSES FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 Schedule 6 December 31, 2012 2011 Administrative and General Salaries $ 1,287,828 $ 1,147,822 Office Supplies and Expenses 308,677 321,333 Outside Services Employed 444,850 485,458 Workmen's Compensation, General Liability, and Other Insurance 115,154 98,898 Employee Benefits 584,077 570,019 Directors' Fees and Expenses 183,367 166,547 Institutional and Goodwill Advertising 13,991 14,514 Dues to Associated Organizations 86,403 79,834 Annual Meeting Expense 86,681 78,761 Miscellaneous General Expenses 316,031 328,030 Regulatory Commission Expense 93,773 97,452 Maintenance of General Plant 457,616 428,223 Total $ 3,978,448 $ 3,816,891

COMPLIANCE SECTION

BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. certified public accountants PHONE: (806) 747-3806 FAX: (806) 747-3815 8215 Nashville Avenue LUBBOCK, TEXAS 79423-1954 LETTER TO BOARD OF DIRECTORS REGARDING POLICIES CONCERNING AUDITS OF CFC BORROWERS Board of Directors Bandera Electric Cooperative, Inc. Bandera, Texas We have audited, in accordance with auditing standards generally accepted in the United States of America, the balance sheet of Bandera Electric Cooperative, Inc. as of December 31, 2012, and the related statements of income and patronage capital and cash flows for the year then ended, and have issued our report thereon dated April 1, 2013. In connection with our audit, nothing came to our attention that caused us to believe that the Cooperative failed to comply with the terms of Article V of the National Rural Utilities Cooperative Finance Corporation Loan Agreement insofar as they relate to accounting matters. However, our audits were not directed primarily toward obtaining knowledge of such noncompliance. This report is intended solely for the information and use of the Boards of Directors and management of Bandera Electric Cooperative, Inc. and the National Rural Utilities Cooperative Finance Corporation and is not intended to be and should not be used by anyone other than these specified parties. Certified Public Accountants April 1, 2013-23-