It’s All About
The Land. 2011 Annual Report
PATRONAG E PAID ($ in millions)
A strong history of stewardship and integrity.
53.3
36.0 31.1 28.6 26.0
Kevin Riel, Board Chair 2007 2008
2
1916
Ag-land values in the Northwest: Idaho $69/acre, Montana $22/acre, Oregon $50/acre, Washington $69/acre.
1920
Capper-Volstead Act authorizes the creation of farmer cooperatives.
1922
2010
2011
For more than 95 years the Farm Credit System has provided farmers and ranchers with a reliable source of credit needed to purchase land and operate our businesses. Here in the Northwest we serve nearly 150 different commodities in a territory that spans close to 1,500 miles. Given our tenure as a lender and the diversity of agriculture, Northwest Farm Credit Services truly understands the value of land and trends in the agricultural marketplace better than any other lender in the Northwest.
In 2011, we were extremely fortunate to have Phil DiPofi serving at the helm of Northwest FCS as President/CEO. Prior to joining Northwest FCS, Phil served as chief banking officer of CoBank, which is Northwest FCS’ funding bank and strategic business partner. Phil’s breadth of business knowledge and experience, along with his global view and understanding of the issues faced by our association and the Farm Credit System, continue to be tremendous assets.
We believe the heart of Northwest FCS’ mission and value lies in our cooperative structure. As the largest financial cooperative in the Northwest, we exist to provide essential capital to rural America and return value to our customer-owners. Through ownership, Northwest FCS customers have a unique say in the governance of this association by electing board members with agricultural, fisheries or forest products backgrounds to represent them. More than 180 Local Advisor Committee members, representing customers in 48 branches, also serve as the eyes and ears of this association. They share what they’re seeing and hearing in the marketplace to reinforce what we’re doing well or to identify areas we need to improve.
We would like to thank director and Montana rancher Ed Malesich who retires from the board after 13 years of service. Ed’s wisdom and even-handed nature provided long-term stability for the organization, particularly during times of economic volatility. We wish Ed and his family the best. 2011 was a tremendous year for Northwest FCS. On behalf of the Northwest FCS Board we thank you for your continued business and trust. Together we accomplish great things.
As a cooperative, we also share our financial success with customers-owners in the form of patronage returns. This year the board and management team reviewed the history of our patronage program and chose to make some changes. We felt customers should be able to better predict patronage levels from year-to-year and that the overall level of patronage should increase. Going forward, the board has set a target level equal to .75 percent of a customers‘ average loan balance for patronage.
Celebrating 95 Years of Credit for Agriculture President Woodrow Wilson signs the Federal Farm Loan Act, creating Federal Land Banks.
2009
The Agricultural Credit Act of 1923 creates 12 Federal Intermediate Credit Banks. The Fiscal Agency Office opens to manage the sale of Farm Credit Bonds.
1923
Federal Land Bank bonds exceed $1 billion for the first time.
1926
The Federal Land Banks repay the federal capital used for the initial 1916 funding.
1932
The Farm Credit Act of 1933 authorizes local Production Credit Associations and created 13 Banks for Cooperatives to expand shortand intermediate-term credit.
1933
Ag-land values in the Northwest: Idaho $33/acre, Montana $8/acre, Oregon $27/acre, Washington $39/acre.
1940
3
PATRONAG E PAID ($ in millions)
A strong history of stewardship and integrity.
53.3
36.0 31.1 28.6 26.0
Kevin Riel, Board Chair 2007 2008
2
1916
Ag-land values in the Northwest: Idaho $69/acre, Montana $22/acre, Oregon $50/acre, Washington $69/acre.
1920
Capper-Volstead Act authorizes the creation of farmer cooperatives.
1922
2010
2011
For more than 95 years the Farm Credit System has provided farmers and ranchers with a reliable source of credit needed to purchase land and operate our businesses. Here in the Northwest we serve nearly 150 different commodities in a territory that spans close to 1,500 miles. Given our tenure as a lender and the diversity of agriculture, Northwest Farm Credit Services truly understands the value of land and trends in the agricultural marketplace better than any other lender in the Northwest.
In 2011, we were extremely fortunate to have Phil DiPofi serving at the helm of Northwest FCS as President/CEO. Prior to joining Northwest FCS, Phil served as chief banking officer of CoBank, which is Northwest FCS’ funding bank and strategic business partner. Phil’s breadth of business knowledge and experience, along with his global view and understanding of the issues faced by our association and the Farm Credit System, continue to be tremendous assets.
We believe the heart of Northwest FCS’ mission and value lies in our cooperative structure. As the largest financial cooperative in the Northwest, we exist to provide essential capital to rural America and return value to our customer-owners. Through ownership, Northwest FCS customers have a unique say in the governance of this association by electing board members with agricultural, fisheries or forest products backgrounds to represent them. More than 180 Local Advisor Committee members, representing customers in 48 branches, also serve as the eyes and ears of this association. They share what they’re seeing and hearing in the marketplace to reinforce what we’re doing well or to identify areas we need to improve.
We would like to thank director and Montana rancher Ed Malesich who retires from the board after 13 years of service. Ed’s wisdom and even-handed nature provided long-term stability for the organization, particularly during times of economic volatility. We wish Ed and his family the best. 2011 was a tremendous year for Northwest FCS. On behalf of the Northwest FCS Board we thank you for your continued business and trust. Together we accomplish great things.
As a cooperative, we also share our financial success with customers-owners in the form of patronage returns. This year the board and management team reviewed the history of our patronage program and chose to make some changes. We felt customers should be able to better predict patronage levels from year-to-year and that the overall level of patronage should increase. Going forward, the board has set a target level equal to .75 percent of a customers‘ average loan balance for patronage.
Celebrating 95 Years of Credit for Agriculture President Woodrow Wilson signs the Federal Farm Loan Act, creating Federal Land Banks.
2009
The Agricultural Credit Act of 1923 creates 12 Federal Intermediate Credit Banks. The Fiscal Agency Office opens to manage the sale of Farm Credit Bonds.
1923
Federal Land Bank bonds exceed $1 billion for the first time.
1926
The Federal Land Banks repay the federal capital used for the initial 1916 funding.
1932
The Farm Credit Act of 1933 authorizes local Production Credit Associations and created 13 Banks for Cooperatives to expand shortand intermediate-term credit.
1933
Ag-land values in the Northwest: Idaho $33/acre, Montana $8/acre, Oregon $27/acre, Washington $39/acre.
1940
3
C AP ITAL ($ in billions)
NET INCOME AF TER TA XES ($ in millions)
1.4
150.1
1.3 1.2 1.1
Building on a competitive advantage.
159.2
124.4
1.1 114.1
106.1
Phil DiPofi, President and CEO 2007 2008
Agriculture has been – and will continue to be – one of the greatest success stories in the United States. And I truly believe the best days lie ahead. As we close in on nearly a century of serving farmers and ranchers, I feel the same sense of optimism about the prospects for Northwest Farm Credit Services. The outlook is bright, though it will take continued ingenuity and discipline to capture the opportunities ahead. Just as farmers and ranchers have been model stewards of the land, our team has the same obligation – to be exceptional stewards of your cooperative in an environment of challenges and exciting opportunities. The past several years have been marked by significant stress and instability in financial markets and the economy in general. Volatility, uncertainty, and in many ways anxiety about what the future holds has permeated all aspects of the economy. Through the efforts of a dedicated staff and board at Northwest FCS, we have built the necessary resources to support our customers, while maintaining strong disciplines needed to avoid the negative consequences that have impacted the banking industry. Most importantly, we have established the necessary financial capacity and experienced staff to provide constructive credit to our customer-owners through these unprecedented, volatile times.
Core Values and Strengths In an industry where uniqueness is difficult to come by and even harder to preserve, we will continue to sharpen our competitive advantages. We are the largest
The Federal Farm Credit Board of Directors was formed to develop national policies for the System and to direct the Farm Credit Administration.
4
1953
The 1955 Farm Credit Act creates a plan for cooperative farmer-borrowers to achieve full ownership of the Banks for Cooperatives.
1955
financial cooperative in the Northwest with a number of unique qualities that clearly separate us from other credit providers: • Entirely focused on the agricultural, food and fiber industries. • A proven track record of being even handed through various commodity and economic cycles. • Relationship managers and staff who have attained trusted advisor status with customers. • Our cooperative structure with farmer-elected governance and strong patronage dividends to customer-owners. • A reliable network of local advisors who provide customer feedback from each of our 48 branches. • Membership in the Farm Credit System which allows us to partner with like-minded cooperatives that participate in larger loans and issue debt to fund loans on a consolidated basis, which lowers our funding costs. 2011 was a very successful year for Northwest FCS. We had record net income of $159.2 million and our capital increased to $1.4 billion. Unlike commercial banks who share earnings in the form of dividends to third-party investors, Northwest FCS
Ag-land values in the Northwest: Idaho $12/acre, Montana $35/acre, Oregon $88/acre, Washington $133/acre.
1960
Production Credit Associations and Banks for Cooperatives pay off federal capital. The Farm Credit System is now owned and capitalized entirely by borrowing stockholders.
1968
customer-owners directly benefit from the success of their cooperative. For 2011 we returned a record $53 million in patronage. This equates to a .75 percent return on our customers’ average loan balance during the year.
Trends in Agriculture Global demand for agriculture is expected to increase significantly over the long term, which favors Northwest producers due to the diversity and quality of production and proximity to export markets. If projections hold true, U.S. net farm income will exceed $100 billion in 2011 for the first time – a 28 percent increase from 2010. USDA expects crop and livestock sales by U.S. farmers to increase more than 16 percent in 2011. On the other side of the ledger, production expenses in 2011 increased by 12 percent. All-in-all, it was an excellent earnings years for most of our customers.
Looking Ahead We expect extreme volatility again in 2012. When Europe is in recession, the euro weakens and the U.S. dollar strengthens. This will be bearish for U.S. commodities. More than 20 percent of total U.S. exports go to Europe and they are a large source of demand for global products. Volatility doesn’t necessarily mean lower than average commodity prices, however it will require a more concerted effort to manage through the uncertainties.
Farm Credit’s lending authority expands to allow “credit related services” including leases, consulting, crop insurance, as well as loans to fishermen, rural homeowners and rural electric and telephone cooperatives.
1971
Producers in the Northwest receive Farm Credit financing through 40 independent Federal Land Bank Associations and 30 independent Production Credit Associations.
1972
2009
2010
2011
2007 2008
2009
2010
2011
A bubble in real estate or housing is characterized by a rapid increase of value that reaches unsustainable levels. Is there a bubble in Pacific Northwest land values? Many influences support farmland values: strong world demand for food, strong farmer balance sheets and low interest rates. While there’s little evidence of excessive lending in the marketplace, rental rates on ag land are increasing at an accelerated rate. Current and projected economic conditions generally support the increase in values, yet optimism should be tempered with caution at this point. Volatile weather plagued farm country throughout 2011. Most crops in the Northwest had some weather issues and we should expect more of the same in 2012. The last two years have been outstanding earning years for most agricultural producers with many experiencing high levels of net cash income. This boost in incomes, combined with low interest rates and a dependable source of credit, will allow producers more opportunities to expand, reduce debt, increase working capital, and take advantage of other investment opportunities. The world increasingly depends on the United States to provide food beyond its borders, which is driving tremendous advances in farm productivity. Being a dependable provider of capital who is completely geared to meet the credit needs of Northwest agriculture is a responsibility we take seriously. We are humbled by the responsibility of serving our nearly 13,000 customer-owners and privileged to be part of this tremendously important value chain of agriculture.
Ag-land values in the Northwest: Idaho $698/acre, Montana $235/acre, Oregon $587/acre, Washington $736/acre.
1980
Ten of the 12 Banks for Cooperatives voted to merge with the Central Bank for Cooperatives to form CoBank.
1989
5
C AP ITAL ($ in billions)
NET INCOME AF TER TA XES ($ in millions)
1.4
150.1
1.3 1.2 1.1
Building on a competitive advantage.
159.2
124.4
1.1 114.1
106.1
Phil DiPofi, President and CEO 2007 2008
Agriculture has been – and will continue to be – one of the greatest success stories in the United States. And I truly believe the best days lie ahead. As we close in on nearly a century of serving farmers and ranchers, I feel the same sense of optimism about the prospects for Northwest Farm Credit Services. The outlook is bright, though it will take continued ingenuity and discipline to capture the opportunities ahead. Just as farmers and ranchers have been model stewards of the land, our team has the same obligation – to be exceptional stewards of your cooperative in an environment of challenges and exciting opportunities. The past several years have been marked by significant stress and instability in financial markets and the economy in general. Volatility, uncertainty, and in many ways anxiety about what the future holds has permeated all aspects of the economy. Through the efforts of a dedicated staff and board at Northwest FCS, we have built the necessary resources to support our customers, while maintaining strong disciplines needed to avoid the negative consequences that have impacted the banking industry. Most importantly, we have established the necessary financial capacity and experienced staff to provide constructive credit to our customer-owners through these unprecedented, volatile times.
Core Values and Strengths In an industry where uniqueness is difficult to come by and even harder to preserve, we will continue to sharpen our competitive advantages. We are the largest
The Federal Farm Credit Board of Directors was formed to develop national policies for the System and to direct the Farm Credit Administration.
4
1953
The 1955 Farm Credit Act creates a plan for cooperative farmer-borrowers to achieve full ownership of the Banks for Cooperatives.
1955
financial cooperative in the Northwest with a number of unique qualities that clearly separate us from other credit providers: • Entirely focused on the agricultural, food and fiber industries. • A proven track record of being even handed through various commodity and economic cycles. • Relationship managers and staff who have attained trusted advisor status with customers. • Our cooperative structure with farmer-elected governance and strong patronage dividends to customer-owners. • A reliable network of local advisors who provide customer feedback from each of our 48 branches. • Membership in the Farm Credit System which allows us to partner with like-minded cooperatives that participate in larger loans and issue debt to fund loans on a consolidated basis, which lowers our funding costs. 2011 was a very successful year for Northwest FCS. We had record net income of $159.2 million and our capital increased to $1.4 billion. Unlike commercial banks who share earnings in the form of dividends to third-party investors, Northwest FCS
Ag-land values in the Northwest: Idaho $12/acre, Montana $35/acre, Oregon $88/acre, Washington $133/acre.
1960
Production Credit Associations and Banks for Cooperatives pay off federal capital. The Farm Credit System is now owned and capitalized entirely by borrowing stockholders.
1968
customer-owners directly benefit from the success of their cooperative. For 2011 we returned a record $53 million in patronage. This equates to a .75 percent return on our customers’ average loan balance during the year.
Trends in Agriculture Global demand for agriculture is expected to increase significantly over the long term, which favors Northwest producers due to the diversity and quality of production and proximity to export markets. If projections hold true, U.S. net farm income will exceed $100 billion in 2011 for the first time – a 28 percent increase from 2010. USDA expects crop and livestock sales by U.S. farmers to increase more than 16 percent in 2011. On the other side of the ledger, production expenses in 2011 increased by 12 percent. All-in-all, it was an excellent earnings years for most of our customers.
Looking Ahead We expect extreme volatility again in 2012. When Europe is in recession, the euro weakens and the U.S. dollar strengthens. This will be bearish for U.S. commodities. More than 20 percent of total U.S. exports go to Europe and they are a large source of demand for global products. Volatility doesn’t necessarily mean lower than average commodity prices, however it will require a more concerted effort to manage through the uncertainties.
Farm Credit’s lending authority expands to allow “credit related services” including leases, consulting, crop insurance, as well as loans to fishermen, rural homeowners and rural electric and telephone cooperatives.
1971
Producers in the Northwest receive Farm Credit financing through 40 independent Federal Land Bank Associations and 30 independent Production Credit Associations.
1972
2009
2010
2011
2007 2008
2009
2010
2011
A bubble in real estate or housing is characterized by a rapid increase of value that reaches unsustainable levels. Is there a bubble in Pacific Northwest land values? Many influences support farmland values: strong world demand for food, strong farmer balance sheets and low interest rates. While there’s little evidence of excessive lending in the marketplace, rental rates on ag land are increasing at an accelerated rate. Current and projected economic conditions generally support the increase in values, yet optimism should be tempered with caution at this point. Volatile weather plagued farm country throughout 2011. Most crops in the Northwest had some weather issues and we should expect more of the same in 2012. The last two years have been outstanding earning years for most agricultural producers with many experiencing high levels of net cash income. This boost in incomes, combined with low interest rates and a dependable source of credit, will allow producers more opportunities to expand, reduce debt, increase working capital, and take advantage of other investment opportunities. The world increasingly depends on the United States to provide food beyond its borders, which is driving tremendous advances in farm productivity. Being a dependable provider of capital who is completely geared to meet the credit needs of Northwest agriculture is a responsibility we take seriously. We are humbled by the responsibility of serving our nearly 13,000 customer-owners and privileged to be part of this tremendously important value chain of agriculture.
Ag-land values in the Northwest: Idaho $698/acre, Montana $235/acre, Oregon $587/acre, Washington $736/acre.
1980
Ten of the 12 Banks for Cooperatives voted to merge with the Central Bank for Cooperatives to form CoBank.
1989
5
2011 2011
Management Executive Committee
Board of Directors
(pictured left to right)
(pictured left to right)
Dave Hedlin Mt. Vernon, Washington; Julie Shiflett Spokane, Washington; Shawn Walters New Dale, Idaho;
Stacy Lavin General Counsel; Kathy Payne Executive VP-HR and Corporate Administration;
Ed Malesich Dillon, MT; Rick Barnes Callahan, California; Kevin Riel Chair – Yakima, Washington;
Tom Nakano Executive VP-Chief Financial Officer; Brent Fetsch Senior VP-Chief Strategy Officer and Chief Information Officer;
Bruce Nelson Spokane, Washington; Dave Nisbet Bay Center, Washington; Karen Schott Vice Chair – Broadview, Montana;
Phil DiPofi President and Chief Executive Officer; Fred DePell Executive VP-Financial Services;
Mark Gehring Salem, Oregon; Jim Farmer Nyssa, Oregon; Christy Burmeister-Smith Newman Lake, Washington;
John Phelan Executive VP-Chief Risk Officer; Jim Allen Senior VP-Capital Markets.
Herb Karst Sunburst, Montana; Drew Eggers Meridian, Idaho.
40 Federal Land Bank Associations merge to form Interstate FLBA. 30 Production Credit Associations merge to form Interstate PCA. Both entities merged to form Northwest FCS, ACA in 1991.
6
1990
Northwest FCS launches its first website at www.farm-credit.com.
1997
Northwest FCS returns patronage to customer-owners for the first time ($17.5 million). Ag-land values in the Northwest: Idaho $1,150/acre, Montana $330/acre, Oregon $1,050/acre, Washington $1,250/acre.
2000
Northwest FCS’ Business Management Center initiates family business facilitation and planning services.
2004
Northwest FCS convenes approximately 100 front-line staff to form 11 new Knowledge Teams that gather and synthesize market information on various commodities.
2006
More than $100 million in claims are paid to support Northwest FCS Insurance Agency customers for the 2009 crop year.
2010
Ag-land values in the Northwest: Idaho $2,050/acre, Montana $710/acre, Oregon $2,000/acre, Washington $2,090/acre.
2011
Northwest FCS’ Business Management Center offers 13 educational programs with 27 dates across the Northwest serving approximately 1,000 customers. The BMC e-newsletter is sent to approximately 600 stakeholders.
2011-2012
7
2011 2011
Management Executive Committee
Board of Directors
(pictured left to right)
(pictured left to right)
Dave Hedlin Mt. Vernon, Washington; Julie Shiflett Spokane, Washington; Shawn Walters New Dale, Idaho;
Stacy Lavin General Counsel; Kathy Payne Executive VP-HR and Corporate Administration;
Ed Malesich Dillon, MT; Rick Barnes Callahan, California; Kevin Riel Chair – Yakima, Washington;
Tom Nakano Executive VP-Chief Financial Officer; Brent Fetsch Senior VP-Chief Strategy Officer and Chief Information Officer;
Bruce Nelson Spokane, Washington; Dave Nisbet Bay Center, Washington; Karen Schott Vice Chair – Broadview, Montana;
Phil DiPofi President and Chief Executive Officer; Fred DePell Executive VP-Financial Services;
Mark Gehring Salem, Oregon; Jim Farmer Nyssa, Oregon; Christy Burmeister-Smith Newman Lake, Washington;
John Phelan Executive VP-Chief Risk Officer; Jim Allen Senior VP-Capital Markets.
Herb Karst Sunburst, Montana; Drew Eggers Meridian, Idaho.
40 Federal Land Bank Associations merge to form Interstate FLBA. 30 Production Credit Associations merge to form Interstate PCA. Both entities merged to form Northwest FCS, ACA in 1991.
6
1990
Northwest FCS launches its first website at www.farm-credit.com.
1997
Northwest FCS returns patronage to customer-owners for the first time ($17.5 million). Ag-land values in the Northwest: Idaho $1,150/acre, Montana $330/acre, Oregon $1,050/acre, Washington $1,250/acre.
2000
Northwest FCS’ Business Management Center initiates family business facilitation and planning services.
2004
Northwest FCS convenes approximately 100 front-line staff to form 11 new Knowledge Teams that gather and synthesize market information on various commodities.
2006
More than $100 million in claims are paid to support Northwest FCS Insurance Agency customers for the 2009 crop year.
2010
Ag-land values in the Northwest: Idaho $2,050/acre, Montana $710/acre, Oregon $2,000/acre, Washington $2,090/acre.
2011
Northwest FCS’ Business Management Center offers 13 educational programs with 27 dates across the Northwest serving approximately 1,000 customers. The BMC e-newsletter is sent to approximately 600 stakeholders.
2011-2012
7
Forward Thinking Family businesses often reflect the character of their patriarchs. Lone Rock Resources is no exception. Fred Sohn was an innovator. With a background in flour milling, Fred knew virtually nothing about lumber mills when he moved his young family to Roseburg, Ore. in the late 1940s to build one from scratch. Sun Studs manufactured everything from broom handles to telephone poles back then. They were the first lumber mill in the world to computerize operations, developing laser scanners to maximize output from each log. The technology which is standard today doubled the volume of traditional mills. Yet, Fred Sohn’s bold vision extended beyond processing to the land he loved and respected. Over the years the family invested heavily in timberland assets, eventually selling the mill in 2001. Today Lone Rock manages and maintains more than 115,000 acres. Managing the land sustainably from an environmental and economic perspective is Lone Rock’s founding principle. The company invests heavily in genetics and reforestation practices. Trees are harvested on a sustainable yields plan that estimates volume every year for the next 50 years. Mindboggling. This strategy allows Lone Rock the flexibility to harvest above sustainable yields when prices are high and less when prices are low while always maintaining a sustainable yield harvest approach.
“Northwest Farm Credit is our partner and they understood the value of our growth strategy. We were partnering with a well-established commercial real estate company, but another bank may have said, ‘What is a timber company doing in commercial real estate?” Toby Luther, Lone Rock Resources
8
Management succession has been a key to Lone Rock’s success. Fred’s five sons served on the board of directors when he retired, with sons Howard and Rick managing the business as Chairman and President/CEO respectively. When the second generation retired in 2008, Lone Rock appointed its first non-family-member CEO, Toby Luther, and the board was restructured to include third-generation family members and outside directors, all with a goal to expand the business. A bold strategic plan was developed through shareholder interviews with 20+ family members across the country. What was important to them? What did they expect in dividend returns? If the company could make more money selling the land assets and investing elsewhere, was that okay? As one might imagine, there was a strong desire to increase dividends to support growing families – a strategy requiring investments in other lines of business. Yet, there was an equally strong, unanimous desire that timber and timberland remain the primary focus of the Sohn family heritage.
9
Forward Thinking Family businesses often reflect the character of their patriarchs. Lone Rock Resources is no exception. Fred Sohn was an innovator. With a background in flour milling, Fred knew virtually nothing about lumber mills when he moved his young family to Roseburg, Ore. in the late 1940s to build one from scratch. Sun Studs manufactured everything from broom handles to telephone poles back then. They were the first lumber mill in the world to computerize operations, developing laser scanners to maximize output from each log. The technology which is standard today doubled the volume of traditional mills. Yet, Fred Sohn’s bold vision extended beyond processing to the land he loved and respected. Over the years the family invested heavily in timberland assets, eventually selling the mill in 2001. Today Lone Rock manages and maintains more than 115,000 acres. Managing the land sustainably from an environmental and economic perspective is Lone Rock’s founding principle. The company invests heavily in genetics and reforestation practices. Trees are harvested on a sustainable yields plan that estimates volume every year for the next 50 years. Mindboggling. This strategy allows Lone Rock the flexibility to harvest above sustainable yields when prices are high and less when prices are low while always maintaining a sustainable yield harvest approach.
“Northwest Farm Credit is our partner and they understood the value of our growth strategy. We were partnering with a well-established commercial real estate company, but another bank may have said, ‘What is a timber company doing in commercial real estate?” Toby Luther, Lone Rock Resources
8
Management succession has been a key to Lone Rock’s success. Fred’s five sons served on the board of directors when he retired, with sons Howard and Rick managing the business as Chairman and President/CEO respectively. When the second generation retired in 2008, Lone Rock appointed its first non-family-member CEO, Toby Luther, and the board was restructured to include third-generation family members and outside directors, all with a goal to expand the business. A bold strategic plan was developed through shareholder interviews with 20+ family members across the country. What was important to them? What did they expect in dividend returns? If the company could make more money selling the land assets and investing elsewhere, was that okay? As one might imagine, there was a strong desire to increase dividends to support growing families – a strategy requiring investments in other lines of business. Yet, there was an equally strong, unanimous desire that timber and timberland remain the primary focus of the Sohn family heritage.
9
Lone Rock’s strategy team explored new lines of business that would complement the timber operation and leverage expertise. Commercial real estate was one, used by similar companies with experience managing longterm, hard assets. If Lone Rock was going to diversify into other real estate assets they needed solid financial partners. “We were working with Northwest Farm Credit and a large commercial lender,” says Toby. “Commercial banks were in a lot of trouble in 2009 when we rolled out the new strategies. Our commercial banker said, ‘I think you’re overestimating your ability to get funding in this environment.’ That’s when Northwest Farm Credit stepped up. We shared our strategies, models and analysis with them, including exit strategies if things didn’t work. We know Farm Credit is an agricultural lender and not necessarily a commercial real estate lender. But, they understand timberland assets better than anyone. In the end, they built the financing package based solely on the value of our timberland operations that still allowed us to execute our new corporate growth strategy.” “We certainly haven’t been a static company the past few years and Northwest Farm Credit has been a huge partner in the whole process,” says Lone Rock Board of Director Paul Sohn. “My background is on Wall Street where I manage a hedge fund portfolio. I’m very familiar with the problems other banks have had. I like to contrast the large, money-center bank mentality to Farm Credit who really understands and works with their customers. There’s no comparison.” Lone Rock Resources and the Sohn family continue to explore ways to enhance the company’s equity to gain better returns. But ultimately, the families’ roots lie deep in the lush Oregon woods. Here they gather each summer for a shareholder meeting and reunion at the family ranch. There are woods tours and summer jobs for the next generation. The Sohn family legacy is timber after all, and planning 50 years ahead is their specialty.
“We were able to �inance Lone Rock to diversify into other assets because we understand the value of their ownership base in timberland.” Suann Harris, Assistant Vice President-Agribusiness
^ Sun Studs mill – 1950
10
11
Lone Rock’s strategy team explored new lines of business that would complement the timber operation and leverage expertise. Commercial real estate was one, used by similar companies with experience managing longterm, hard assets. If Lone Rock was going to diversify into other real estate assets they needed solid financial partners. “We were working with Northwest Farm Credit and a large commercial lender,” says Toby. “Commercial banks were in a lot of trouble in 2009 when we rolled out the new strategies. Our commercial banker said, ‘I think you’re overestimating your ability to get funding in this environment.’ That’s when Northwest Farm Credit stepped up. We shared our strategies, models and analysis with them, including exit strategies if things didn’t work. We know Farm Credit is an agricultural lender and not necessarily a commercial real estate lender. But, they understand timberland assets better than anyone. In the end, they built the financing package based solely on the value of our timberland operations that still allowed us to execute our new corporate growth strategy.” “We certainly haven’t been a static company the past few years and Northwest Farm Credit has been a huge partner in the whole process,” says Lone Rock Board of Director Paul Sohn. “My background is on Wall Street where I manage a hedge fund portfolio. I’m very familiar with the problems other banks have had. I like to contrast the large, money-center bank mentality to Farm Credit who really understands and works with their customers. There’s no comparison.” Lone Rock Resources and the Sohn family continue to explore ways to enhance the company’s equity to gain better returns. But ultimately, the families’ roots lie deep in the lush Oregon woods. Here they gather each summer for a shareholder meeting and reunion at the family ranch. There are woods tours and summer jobs for the next generation. The Sohn family legacy is timber after all, and planning 50 years ahead is their specialty.
“We were able to �inance Lone Rock to diversify into other assets because we understand the value of their ownership base in timberland.” Suann Harris, Assistant Vice President-Agribusiness
^ Sun Studs mill – 1950
10
11
Sustainable Legacy J.R. ‘Jack’ Simplot began his career in agriculture at the age of 14 when he quit school and went into business for himself near the small farming community of Declo, Idaho, in 1923. He bought his first piece of ground three years later. With an unyielding commitment to innovation and efficiency, J.R. purchased Idaho’s first mechanized potato sorter in 1928 and later invested in an innovative vegetable dehydration system. By the early years of World War II, the Simplot Company was the largest shipper of fresh potatoes in the country and was selling millions of pounds of dehydrated onions and potatoes to the military. When wartime shortages made it difficult to buy fertilizer, Jack built a manufacturing plant in Pocatello, Idaho, and produced his own. This type of ingenuity and forward thinking also led to a postwar breakthrough – the first commercially viable frozen french fries in the world. Yet, given all the early accomplishments J.R. was often quoted as saying, “I’m just an old dirt farmer who made good. It’s all about the land.” Today the J.R. Simplot Company’s integrated portfolio includes farming, ranching, cattle production, phosphate mining, fertilizer manufacturing, food processing, and food brands. With sales of approximately $5.6 billion, the privately-held family business has more than 30 farms, a dozen ranches with 30,000 mother cows, one of the largest herds in the country, and is the largest phosphate producer in the West. Simplot employs more than 10,000 people worldwide and produces 1,000 different food products for the foodservice industry, ranging from a variety of potato products to avocados, fruits and vegetables. “Food and agricultural systems will continue to evolve to meet growing global demand, particularly from developing countries. We must take on new technologies that lead to new opportunities and new market channels in order to leverage our core competencies and experiences.” Bill Whitacre, J.R. Simplot
While Simplot may be vast in scope, the company still operates with small town values. Their philosophy is simple: “to do well by honoring their commitments.” These commitments include the company’s pledge to sustainability. For Simplot, sustainability includes developing technologies that have the potential to decrease the land, energy and fresh water needed for agriculture, while increasing the per-acre productivity needed to feed an additional three billion people within the next 50 years. “Producing more with less of our earth’s resources is not only good for business but it is truly the right thing to do,” says Simplot President and CEO Bill Whitacre. “At Simplot we have three fundamental principles – a passion
12
13
Sustainable Legacy J.R. ‘Jack’ Simplot began his career in agriculture at the age of 14 when he quit school and went into business for himself near the small farming community of Declo, Idaho, in 1923. He bought his first piece of ground three years later. With an unyielding commitment to innovation and efficiency, J.R. purchased Idaho’s first mechanized potato sorter in 1928 and later invested in an innovative vegetable dehydration system. By the early years of World War II, the Simplot Company was the largest shipper of fresh potatoes in the country and was selling millions of pounds of dehydrated onions and potatoes to the military. When wartime shortages made it difficult to buy fertilizer, Jack built a manufacturing plant in Pocatello, Idaho, and produced his own. This type of ingenuity and forward thinking also led to a postwar breakthrough – the first commercially viable frozen french fries in the world. Yet, given all the early accomplishments J.R. was often quoted as saying, “I’m just an old dirt farmer who made good. It’s all about the land.” Today the J.R. Simplot Company’s integrated portfolio includes farming, ranching, cattle production, phosphate mining, fertilizer manufacturing, food processing, and food brands. With sales of approximately $5.6 billion, the privately-held family business has more than 30 farms, a dozen ranches with 30,000 mother cows, one of the largest herds in the country, and is the largest phosphate producer in the West. Simplot employs more than 10,000 people worldwide and produces 1,000 different food products for the foodservice industry, ranging from a variety of potato products to avocados, fruits and vegetables. “Food and agricultural systems will continue to evolve to meet growing global demand, particularly from developing countries. We must take on new technologies that lead to new opportunities and new market channels in order to leverage our core competencies and experiences.” Bill Whitacre, J.R. Simplot
While Simplot may be vast in scope, the company still operates with small town values. Their philosophy is simple: “to do well by honoring their commitments.” These commitments include the company’s pledge to sustainability. For Simplot, sustainability includes developing technologies that have the potential to decrease the land, energy and fresh water needed for agriculture, while increasing the per-acre productivity needed to feed an additional three billion people within the next 50 years. “Producing more with less of our earth’s resources is not only good for business but it is truly the right thing to do,” says Simplot President and CEO Bill Whitacre. “At Simplot we have three fundamental principles – a passion
12
13
< Planting Simplot potatoes – 1944
for people, a commitment to innovation and technology and a respect for resources, particularly natural resources. It’s how we do business.” Recycled potato by-products from Simplot food processing plants provide a nutrient-rich feed source for their livestock operations. Manure is derocked, composted and applied to build soil quality for Simplot farms and neighboring operations. Anaerobic digesters installed at a number of food processing plants capture biogas, which is used to power the plants’ boiler systems. The Moses Lake, Washington, facility for example, has reduced greenhouse gas emissions by 15,000 tons annually in the process. Water recovery and conservation efforts in the Pocatello, Idaho, fertilizer plant has saved more than one billion gallons of fresh water in two years, or enough to sustain 10,000 average households for a year. “We continue to invest heavily in new technologies to grow and process food, help farmers and ranchers optimize profits and make everyone’s life a little better,” says Simplot Board Chairman Scott Simplot. “We look at agriculture as a whole system of activities, from plant nutrients to food processing to taking care of our land and water resources. That’s why we need a lender who understands agriculture and the investments we’re making. The wiser the lender the easier it is to talk to them and Northwest Farm Credit has been a wonderful business partner.”
“My dad always said, ‘Get a piece of America and hold on to it.’ That’s what it’s all about. We’re farmers and we need to know our land and treat it at its highest and best use. The drive for ef�iciencies will be the key moving forward.” Scott Simplot, J.R. Simplot Company
“ I’m just
an old dirt farmer who made good.
It’s all about the land.” J.R. Simplot
14
15
< Planting Simplot potatoes – 1944
for people, a commitment to innovation and technology and a respect for resources, particularly natural resources. It’s how we do business.” Recycled potato by-products from Simplot food processing plants provide a nutrient-rich feed source for their livestock operations. Manure is derocked, composted and applied to build soil quality for Simplot farms and neighboring operations. Anaerobic digesters installed at a number of food processing plants capture biogas, which is used to power the plants’ boiler systems. The Moses Lake, Washington, facility for example, has reduced greenhouse gas emissions by 15,000 tons annually in the process. Water recovery and conservation efforts in the Pocatello, Idaho, fertilizer plant has saved more than one billion gallons of fresh water in two years, or enough to sustain 10,000 average households for a year. “We continue to invest heavily in new technologies to grow and process food, help farmers and ranchers optimize profits and make everyone’s life a little better,” says Simplot Board Chairman Scott Simplot. “We look at agriculture as a whole system of activities, from plant nutrients to food processing to taking care of our land and water resources. That’s why we need a lender who understands agriculture and the investments we’re making. The wiser the lender the easier it is to talk to them and Northwest Farm Credit has been a wonderful business partner.”
“My dad always said, ‘Get a piece of America and hold on to it.’ That’s what it’s all about. We’re farmers and we need to know our land and treat it at its highest and best use. The drive for ef�iciencies will be the key moving forward.” Scott Simplot, J.R. Simplot Company
“ I’m just
an old dirt farmer who made good.
It’s all about the land.” J.R. Simplot
14
15
Growing Opportunities “If a family doesn’t have the next generation coming back, or their kids inherit the land, will they sell ground at the highest price or give a young farmer a chance? It’s their preference. But, I wouldn’t have this opportunity without Bob and the people at Northwest Farm Credit.” Chad Dees, Dusty Bins Farm (with Credit Of�icer, Jennifer Roberts)
Bob Reinhart and his late wife Kathryn could have sold their property for top dollar. Competition for purchasing and leasing farm land is extremely fierce in northern Montana where prices continue to rise. There were plenty of producers wanting to grow and expand. But, Bob never forgot the opportunity he had as a young man to begin farming with Kathryn’s family in 1946. Then, when Kathryn passed away and her will designated a portion of the land be sold to a beginning producer, Bob went a step further. He would honor his wife’s memory by selling the land below market value to Chad Dees, the hardworking neighbor boy they watched grow to adulthood. Chad was working construction back then and coming home on weekends to help his dad farm. Given the economic realities, Chad figured he would need to work both jobs until his father Chuck could afford to retire someday. Chuck was trying to find ways to lease Chad ground and meet his own financial obligations when Bob stepped forward with an offer. He would lease Chad 1,000 acres on a generous crop-share agreement. Months later, Chad was also given the opportunity to buy the land set aside in Katheryn’s will. “I had the opportunity of a lifetime so I thought that over,” says Bob. “Most young people today don’t have the same opportunities I had. Everything has gotten so expensive. Back in our day we didn’t fertilize, we didn’t spray, and those can cost thousands of dollars. To get a farm today you almost need to marry one, or inherit one, and then you need to have enough money to run it. Or, you can go see Northwest Farm Credit.” Chad Dees was a perfect fit for Northwest FCS’ AgVision program, which helps young and beginning producers get started in agriculture. Credit Officer Jennifer Roberts helped Chad secure an operating loan and a real estate loan with joint financing from Farm Service Agency’s Beginning Farmer Down Payment Program. With the unique financing package, Chad only needed 5 percent down; FSA financed 45 percent over 20 years at 1.5 percent interest, and Northwest FCS funded the balance over 30 years to help Chad meet his cash flow projections.
16
17
Growing Opportunities “If a family doesn’t have the next generation coming back, or their kids inherit the land, will they sell ground at the highest price or give a young farmer a chance? It’s their preference. But, I wouldn’t have this opportunity without Bob and the people at Northwest Farm Credit.” Chad Dees, Dusty Bins Farm (with Credit Of�icer, Jennifer Roberts)
Bob Reinhart and his late wife Kathryn could have sold their property for top dollar. Competition for purchasing and leasing farm land is extremely fierce in northern Montana where prices continue to rise. There were plenty of producers wanting to grow and expand. But, Bob never forgot the opportunity he had as a young man to begin farming with Kathryn’s family in 1946. Then, when Kathryn passed away and her will designated a portion of the land be sold to a beginning producer, Bob went a step further. He would honor his wife’s memory by selling the land below market value to Chad Dees, the hardworking neighbor boy they watched grow to adulthood. Chad was working construction back then and coming home on weekends to help his dad farm. Given the economic realities, Chad figured he would need to work both jobs until his father Chuck could afford to retire someday. Chuck was trying to find ways to lease Chad ground and meet his own financial obligations when Bob stepped forward with an offer. He would lease Chad 1,000 acres on a generous crop-share agreement. Months later, Chad was also given the opportunity to buy the land set aside in Katheryn’s will. “I had the opportunity of a lifetime so I thought that over,” says Bob. “Most young people today don’t have the same opportunities I had. Everything has gotten so expensive. Back in our day we didn’t fertilize, we didn’t spray, and those can cost thousands of dollars. To get a farm today you almost need to marry one, or inherit one, and then you need to have enough money to run it. Or, you can go see Northwest Farm Credit.” Chad Dees was a perfect fit for Northwest FCS’ AgVision program, which helps young and beginning producers get started in agriculture. Credit Officer Jennifer Roberts helped Chad secure an operating loan and a real estate loan with joint financing from Farm Service Agency’s Beginning Farmer Down Payment Program. With the unique financing package, Chad only needed 5 percent down; FSA financed 45 percent over 20 years at 1.5 percent interest, and Northwest FCS funded the balance over 30 years to help Chad meet his cash flow projections.
16
17
< Kathryn Reinhart – 1944
Helping
young producers get started.
“Northwest Farm Credit is a great company,” says Chad. “They really focus on helping younger producers get started. Coming from the construction industry I didn’t have a lot of experience doing the books. Jennifer helped me understand the meaning behind the numbers and estimate my first year expenses.” “I think mentorship is the most important part of the AgVision program,” says Jennifer. “Sure, the fee waivers and reduced interest rates are a good thing. But the real value is the amount of time we can actually spend on these accounts to help beginning producers understand their finances. We help them appreciate why knowing their financial ratios and maintaining certain capital levels are important. Chad picked up the numbers quickly and he had a great first year. That’s the most rewarding part of my job.”
“My wife’s parents gave me the opportunity of a lifetime to start farming many years ago. Young people today don’t have the opportunities I had. That’s why we wanted to help another young producer. I’m proud of what Kathryn and I accomplished all those years.We had a wonderful life together.” Bob Reinhart
18
2011 NORTHWEST FARM CREDIT SERVICES, ACA Annual Report to Stockholders
1
NORTHWEST FARM CREDIT SERVICES, ACA
The undersigned certify the 2011 Annual Report to Stockholders has been prepared in accordance
REPORT OF MANAGEMENT
with all applicable statutory or regulatory requirements and the information contained herein is true, accurate, and complete to the best of our knowledge.
The financial statements of Northwest Farm Credit Services, ACA (Northwest FCS) are prepared by management, who is responsible for their integrity and objectivity, including amounts that must be necessarily based on judgments and estimates. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The
Phil DiPofi
Tom Nakano
Kevin Riel
financial statements, in the opinion of management, fairly present the financial condition of
President and CEO
Executive VP-CFO
Chair of the Board
Northwest FCS. Other financial information included in the 2011 Annual Report to Stockholders is
March 1, 2012
March 1, 2012
March 1, 2012
consistent with that in the financial statements. To meet its responsibility for reliable financial information, management depends on Northwest FCS’ accounting and internal control systems, which have been designed to provide reasonable, but not absolute, assurances that assets are safeguarded and transactions are properly authorized and recorded. The systems have been designed to recognize the cost must be related to the benefits derived. To monitor compliance, the internal audit staff performs audits of the accounting records, reviews accounting systems and internal controls, and recommends improvements as appropriate. The financial statements are audited by PricewaterhouseCoopers LLP, independent auditors, who, as part of the audit process, also conduct an audit of internal controls to obtain a sufficient understanding of the internal control structure in order to establish a basis for reliance thereon in determining the nature, extent, and timing of procedures applied to the audit of the financial statements. Northwest FCS is also examined by the Farm Credit Administration. The Chief Executive Officer, as delegated by the Northwest FCS Board of Directors, has overall responsibility for Northwest FCS’ system of internal controls and financial reporting. The Board has delegated significant responsibility to the Audit Committee, which is comprised entirely of directors who are independent of Northwest FCS’ management. The Audit Committee is responsible for recommending to the Board the selection of independent auditors. It meets periodically with management, the independent auditors, and the internal auditors to ensure they are carrying out their responsibilities. The Audit Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting, and auditing procedures of Northwest FCS in addition to reviewing Northwest FCS’ financial reports. The independent auditors and the internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the adequacy of the internal control structure for financial reporting and any other matters they believe should be brought to the attention of the committee.
2
NORTHWEST FARM CREDIT SERVICES, ACA
Northwest FCS’ independent auditors, PricewaterhouseCoopers LLP, who audit Northwest FCS’
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
consolidated financial statements, have issued a report on the effectiveness of internal control over financial reporting. See Report of Independent Auditors.
Management of Northwest Farm Credit Services, ACA and its wholly-owned subsidiaries (Northwest FCS) is responsible for establishing and maintaining adequate internal control over financial reporting for Northwest FCS’ consolidated financial statements. For purposes of this report, “internal control over financial reporting” is defined as a process designed by or under the supervision of Northwest FCS’ principal executives and principal financial officers, or persons performing similar functions, and effected by its board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting information and the preparation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Northwest FCS, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial information in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and directors of Northwest FCS, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Northwest FCS’ assets that could have a material effect on its consolidated financial statements. Northwest FCS’ management has completed an assessment of the effectiveness of internal control over financial reporting as of December 31, 2011. In making the assessment, management used the framework in Internal Control—Integrated Framework, promulgated by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as the “COSO” criteria. Based on the assessment performed, Northwest FCS concluded that as of December 31, 2011, the internal control over financial reporting was effective based upon the COSO criteria. Additionally, based on this assessment, Northwest FCS determined there were no material weaknesses in the internal control over financial reporting as of December 31, 2011.
3
Phil DiPofi
Tom Nakano
Kevin Riel
President and CEO
Executive VP-CFO
Chair of the Board
March 1, 2012
March 1, 2012
March 1, 2012
NORTHWEST FARM CREDIT SERVICES, ACA
Based on the foregoing review and discussions, and relying thereon, the Audit Committee
REPORT OF AUDIT COMMITTEE
recommended the Board of Directors include the audited financial statements in the annual report as of and for the year ended December 31, 2011.
The Audit Committee is composed of six members of the Northwest FCS’ Board of Directors. In 2011, the Audit Committee met six times in person and participated in several conference calls. The Audit Committee oversees the scope of Northwest FCS’ internal audit program, the independence of the outside auditors, the adequacy of Northwest FCS’ system of internal controls and procedures, and the adequacy of management’s action with respect to recommendations
Christy Burmeister-Smith
arising from those auditing activities. In addition, the Audit Committee approved the appointment
Chair of the Audit Committee
of PricewaterhouseCoopers, LLP (PwC) as our independent auditors for 2011. The Audit
March 1, 2012
Committee’s responsibilities are described more fully in the Internal Controls Policy and the Audit Committee Operating Statement.
Herb Karst Julie Shiflett
Management is responsible for internal controls and the preparation of the financial statements in
Dave Nisbet
accordance with accounting principles generally accepted in the United States of America. PwC is
Ed Malesich
responsible for performing an independent audit of the financial statements in accordance with
Jim Farmer
generally accepted auditing standards in the United States of America and to issue their report based on the audit. The Audit Committee’s responsibilities include monitoring and overseeing these processes. In this context, the Audit Committee reviewed and discussed the audited financial statements for the year ended December 31, 2011, with management. The Audit Committee also reviewed with PwC the matters required to be discussed by Statement on Auditing Standards No. 114, as amended (Communication with Audit Committees), and both PwC and the internal auditors directly provided reports on significant matters to the Audit Committee. The Audit Committee received the written disclosures and the letter from PwC in accordance with Independence Standards Board Standard No. 1 (Independence Discussion with Audit Committees), and discussed with PwC its independence. The Audit Committee requires prior approval of all nonaudit services provided by PwC. In 2011, PwC was engaged for tax compliance work. The Audit Committee has discussed with management and PwC such other matters and received such assurances from them as the Audit Committee deemed appropriate.
4
NORTHWEST FARM CREDIT SERVICES, ACA
Five-Year Summary of Selected Financial Data (dollars in thousands) Decem ber 31,
BALANCE SHEET DATA Cash Loans Less: allowance for loan losses Net loans
2011
$
Investment in and receivable from CoBank, ACB Other property owned, net Deferred tax asset, net Other assets Total assets Obligations with maturities of one year or less Obligations with maturities greater than one year
62,188 8,285,356 126,500 8,158,856
$
309,141 6,211 8,322 152,029
47,229 8,286,216 111,000 8,175,216
2009
$
306,931 9,562 9,655 156,837
87,172 8,122,932 96,000 8,026,932
2008
$
304,254 524 6,651 153,911
60,966 7,884,852 48,000 7,836,852
2007
$
274,631 1,328 2,675 149,748
79,319 6,571,850 33,000 6,538,850 243,521 11 987 158,293
$
8,696,747
$
8,705,430
$
8,579,444
$
8,326,200
$
7,020,981
$
2,752,884 4,505,393
$
2,567,577 4,798,301
$
2,471,731 4,888,643
$
2,631,691 4,561,050
$
2,171,946 3,784,014
Total liabilities Capital stock and participation certificates Accumulated other comprehensive loss, net of tax Unallocated retained earnings Total members' equity Total liabilities and members' equity
2010
7,258,277
7,365,878
7,360,374
7,192,741
5,955,960
13,119 (30,052) 1,455,403
13,087 (23,046) 1,349,511
12,762 (29,097) 1,235,405
12,410 (34,302) 1,155,351
11,833 (8,595) 1,061,783
1,438,470
1,339,552
1,219,070
1,133,459
1,065,021
$
8,696,747
$
8,705,430
$
8,579,444
$
8,326,200
$
7,020,981
$
261,307 47,341 70,032 118,542 6,300
$
247,445 63,056 78,341 109,430 3,236
$
230,835 79,381 68,796 116,517 (2,352)
$
192,001 19,239 59,175 101,565 5,998
$
166,230 5,090 52,577 96,862 2,728
$
159,156
$
150,064
$
106,085
$
124,374
$
114,127
STATEMENT OF INCOME DATA Net interest income Provision for credit losses Noninterest income Noninterest expenses Income tax provision/(benefit) Net income KEY FINANCIAL RATIOS FOR THE YEAR Return on average assets Return on average members' equity Net interest income as a percentage of average earning assets Net charge-offs as a percentage of average loans
1.9% 11.3% 3.2% 0.3%
1.8% 11.6% 3.1% 0.6%
1.3% 9.0% 2.9% 0.4%
1.6% 11.2% 2.7% 0.1%
1.8% 11.1% 2.7% 0.0%
AT YEAR END Members' equity as a percentage of total assets Debt as a ratio to members' equity Allowance for loan losses as a percentage of loans and interest Permanent capital ratio Core capital ratio Total surplus ratio
16.5% 5.0:1 1.5% 13.8% 13.7% 13.7%
15.4% 5.5:1 1.3% 13.2% 13.0% 13.0%
14.2% 6.0:1 1.2% 12.2% 12.1% 12.1%
13.6% 6.3:1 0.6% 12.7% 12.3% 12.5%
15.2% 5.6:1 0.5% 14.7% 13.7% 14.5%
OTHER Loans serviced for other entities Patronage dividends declared to members
$ $
1,769,143 53,264
$ $
5
1,652,027 35,958
$ $
1,614,756 26,031
$ $
1,552,890 31,125
$ $
1,317,687 28,550
NORTHWEST FARM CREDIT SERVICES, ACA
reporting instructions; the ability of states to adopt more extensive consumer privacy protections
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
through legislation or regulation; the resolution of legal proceedings and related matters; and nonperformance by counterparties to derivative positions.
2011 Financial Highlights The year ended December 31, 2011 reflected positive financial performance. Record earnings and a strong capital position allowed us to declare a cash patronage distribution of $53.3 million
The following commentary is a review of the financial condition and results of operations of
representing a return of approximately 75 basis points for the majority of our eligible customers
Northwest Farm Credit Services, an Agricultural Credit Association, and its wholly-owned
based on their average 2011 loan balances. This return of value helped reduce our customers’
subsidiaries (Northwest FCS). The commentary should be read in conjunction with the
financing costs. Other highlights include:
accompanying financial statements and notes. Stockholder investments in Northwest FCS are •
materially affected by the financial condition and results of operations of CoBank, ACB. To obtain a
Net income for the year was $159.2 million, up 6.1 percent from 2010. This increase was
free copy of the CoBank Annual Report to Stockholders, please contact us at Northwest Farm
driven by a rise in net interest income over 2010, achieved largely from decreased funding
Credit Services, ACA, P.O. Box 2515, Spokane, Washington 99220-2515, call
costs and a reduced provision for loan loss expense when compared to the prior year.
(509) 340-5300, or access CoBank’s website at www.cobank.com. Dollar amounts are in thousands
•
unless otherwise stated.
Capital levels remained strong and well in excess of regulatory minimums. As of December 31, 2011, our members’ equity totaled $1.4 billion, and our permanent capital ratio was 13.8 percent.
The financial statements were prepared under the oversight of the Audit Committee. •
Forward-Looking Statements
Our loan portfolio volume remained relatively unchanged in 2011, with an ending gross loan and accrued interest balance of $8.4 billion.
Certain statements contained in this report that are not historical facts are forward-looking
•
statements within the meaning of the Private Securities Litigation Reform Act. Our actual results
Credit quality and nonaccrual loans improved in 2011 when compared to 2010, and we anticipate this positive trend to continue. Asset quality, as measured by loans in the two
may differ materially from those included in the forward-looking statements that relate to plans,
highest classifications, was 93.2 percent at December 31, 2011, a 0.7 percent improvement
projections, expectations, and intentions. Forward-looking statements are typically identified by
compared to the same period last year.
words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “plan,” “project,” “may,” “will,” “should,” “would,” “could” or similar expressions. Although we believe the information
Commodity Review and Outlook
expressed or implied in such forward-looking statements is reasonable, no assurance can be given
In general, agricultural conditions in our territory were positive for 2011, and with our diverse
that such projections and expectations will be realized or the extent to which a particular plan,
commodity base, many of our customers benefited from strong prices and demand. However,
projection, or expectation may be realized. These forward-looking statements are based on current
concern remains in some commodities that are still struggling during this period of slow
knowledge and are subject to various risks and uncertainties, including, but not limited to:
improvement in the U.S. economy. The following reflects conditions for key commodities and
fluctuations in the agricultural, energy, international and leasing industry sectors; United States
products:
and global economic conditions; sovereign or regulatory actions; the level of interest rates; changes in assumptions underlying the valuations of financial instruments; changes in estimates
D A I R Y : Northwest milk prices have declined with breakeven prices pressured by high hay
underlying the allowance for credit losses; economic conditions and credit performance of the loan
prices. Although stronger prices in 2010/2011 allowed many producers to recover from the
portfolio, growth and seasonal factors; tax reform; the effect of banking and financial services
2008/2009 industry downturn, some producers are struggling to maintain a competitive cost
reforms; possible amendments to, and interpretations of, risk-based capital guidelines and
structure in the current market.
6
During 2011, 9.2 million milk cows produced 196.1 billion pounds of milk, reflecting a 1.7 percent
C A T T L E : The cattle market is strong and prices are record setting at the close of the marketing
annual increase. Year-over-year milk cow numbers and production per cow were up 0.9 percent
year for the 2011 calf crop. The strong fed cattle market and reduced cow numbers have spurred
and 0.8 percent respectively. Milk production in 2012 is forecast to increase to 198.5 billion
calf and feeder prices well above historical levels. Current calf and feeder prices are strong.
pounds.
Replacement cow and heifer numbers continue to decline in the U.S. and other cattle exporting countries, keeping pressure on supply and indicating higher cattle prices in 2012.
F O R E S T P R O D U C T S : Log prices have experienced a strong recovery since 2009, especially in the Pacific Northwest’s coastal regions, where ports facilitated exports of logs to China. The
The latest USDA forecast for 2012 shows a continuing increase in red meat exports, despite lower
outlook for 2012 softwood log and lumber is for volatility as prices declined in the fourth quarter of
U.S. beef production. This is a result of higher unit values and a stronger demand from major
2011. Although China is expected to continue to demand wood fiber due to the resource gap
markets, particularly Asia. The USDA is forecasting lower imports in 2012, as limited supplies will
between its domestic resources and actual log consumption, log exports will be pressured down by
be subject to demand from other countries. International export markets will continue to be a
lower Chinese demand.
critical component of U.S. beef demand.
Domestically, demand for logs, lumber, and panels are expected to remain generally weak. New
W H E A T : Most wheat producers are well positioned entering 2012. Strong yields, early
home construction remains flat and home prices continue to decline due to a large inventory of
marketing, and prudent use of crop insurance support solid 2011 results. The 2011/2012 season-
existing homes for sale and homes moving toward foreclosure. The overhang of existing homes
average price received by farmers is projected to range from $7.05 to $7.55 per bushel. Although
and estimated time to absorb this inventory are expected to push a recovery in housing starts to
wheat prices are currently lower, season-average wheat prices are supported by early-season
late 2014.
marketing and forward sales.
A P P L E S : Overall fruit size is down this year, but quality has been good. Some apples were
Winter wheat crop conditions throughout the Northwest are average. Wheat crops in Eastern
damaged by cold weather this past fall and will not store well. Other conditions have affected this
Oregon, Eastern Washington, and Northern Idaho were sowed into favorable soil conditions,
year’s crop in some locations. Water core, a disorder that degrades and discolors internal fruit
providing a strong start to the new crop. In Montana, conditions were drier presenting farmers
tissue, affected some apple varieties. However, overall pack-outs have been good and it appears
tougher growing conditions.
that more apples made it to storage than expected despite the late harvest, cold weather, and Projected U.S. 2011/2012 wheat production of 2 billion bushels is 9.4 percent less than estimated
picker shortage.
2010/2011 production and 9.9 percent less than 2009/2010 production. United States production The 2011/2012 total crop yield is fairly small by the standard of the previous two years’ crops.
challenges included severe drought on the Central and Southern Plains and excessive moisture and
Some warehouses are concerned they won’t have enough fruit to make it through the summer and
cool temperatures on the Northern Plains. Exceptions included white wheat and soft red wheat,
are beginning to control movement accordingly. Crop movement is strong in both the domestic
with production up in both from 2010/2011. Globally, wheat production and supply is projected at
and export markets, despite harvest delays. Season-to-date average prices are above $23 per box
new records in 2011/2012 based on higher projected wheat production and large carryover stocks
for the 2011/2012 crop compared to more than $20 last year and prices above $18 per box for
from the prior year.
2009/2010. P O T A T O E S : Potato growers are optimistic entering 2012 due to strong potato markets, with The small crop, good prices, and strong movement suggest that growers can generally expect
demand supporting prices above $8 per cwt. Prices are currently high for contracted and non-
strong returns for their 2011 crop. Given the amount of smaller fruit in the marketplace this year,
contracted potatoes alike, but some growers are postponing sales hoping that less supply will
target size fruit is expected to enjoy price differentiation in the market. The positive outlook for the
support even higher prices later in the season.
2011/2012 crop is supported by robust domestic and export demand evident in the marketplace.
7
Potato production in Idaho, Washington, Oregon, and Montana was up 12 percent in 2011.
Loan Portfolio
Overall, potato quality and size is excellent, although producers forced into an early harvest have
Gross loans and accrued interest for the past three years are presented in the following table:
smaller potatoes and lower yields. N U R S E R Y : After three years of the toughest economic downturn in decades, many nursery producers are guardedly optimistic about prospects for 2012 as the economy improves. Orders through December are up from a year ago and at higher prices. Buyers are placing orders earlier in view of perceived shortages of some plant varieties and concerns about access to quality plant material. Whether or not orders actually materialize into cash sales depends upon spring weather conditions and consumer demand. Challenges facing most producers revolve around uncertainties in the market, higher operating costs, labor shortages and consumer confidence to support plant sales. Cash flow challenges still impact most producers who depleted liquidity due to losses the past few years.
Total loans and accrued interest outstanding were $8.36 billion at December 31, 2011, and remained relatively unchanged when compared to the prior year. In 2011, overall slow growth in
H A Y : Hay supplies are at historically tight levels in the Northwest. Itâ&#x20AC;&#x2122;s expected that nearly all of
the U.S. economy has made finding new lending opportunities in the current economic
the alfalfa stocks in the region are committed and nearly all have been paid for as buyers locked-in
environment challenging. Many producers took a conservative approach to operating their
supplies earlier in the season.
business, demonstrating a greater focus on debt reduction and positioning capital versus investing in new assets or growing their business.
Overall, hay quality in the Northwest is down from historical levels, but market demand remains. The narrow price spread between fair and premium quality alfalfa in the region incentivized
The following table reflects activity within the nonaccrual loan portfolio:
growers to focus production on yield rather than quality this year. Average year-over-year alfalfa prices for Idaho, Oregon, and Washington are up 85.8, 67.8, and 84.6 percent respectively according to data from the National Agricultural Statistics Service. The market for export hay in the Northwest remains strong with hay exports up 14.2 percent yearover-year. Lower transportation costs and favorable exchange rates have given a competitive edge to foreign buyers looking to purchase hay.
As of December 31, 2011, nonaccrual loans that were current as to principal and interest installments totaled $178,298 representing 73.4 percent of the nonaccrual loan portfolio compared to $204,702 representing 74.2 percent of the nonaccrual loan portfolio at December 31, 2010, and $198,161 representing 73.2 percent of the nonaccrual loan portfolio at December 31, 2009.
8
Allowance for Credit Losses
Coverage of the AFLL, as a percentage of certain key loan categories, is presented in the following
The allowance for credit losses is comprised of the allowance for loan losses and the reserve for
table:
unfunded lending commitments. The allowance for credit losses is our best estimate of the amount of probable losses inherent in our loan portfolio at the balance sheet date. The allowance for credit losses is determined based on a periodic evaluation of the loan portfolio and unfunded lending commitments, which generally considers types of loans, credit quality, specific industry conditions, general economic and political conditions, and changes in the character, composition, and performance of the portfolio, among other factors. The allowance for credit losses is calculated based on a historical loss model that takes into consideration risk characteristics of our various
Results of Operations
loan portfolios. We evaluate the reasonableness of this model and determine whether adjustments
Our net income for the year ended December 31, 2011, was $159,156, compared to $150,064 for
to the allowance are appropriate to reflect the risks inherent in the portfolio.
2010 and $106,085 for 2009. The following table provides detail of changes in the components of our net income:
Individual loans are evaluated based on the borrowerâ&#x20AC;&#x2122;s overall financial condition, resources, and payment record; the prospects for support from any financially responsible guarantor; and, if appropriate, the estimated net realizable value of any collateral. The allowance for loan losses attributable to these loans is established by a process that estimates the probable loss inherent in the loans, taking into account various historical and projected factors, internal risk ratings, regulatory oversight, geographic, industry and other factors. We maintain a contingency loss on unfunded commitments. The contingency loss reflects our best estimate of losses inherent in lending commitments made to customers but not yet disbursed upon. Factors such as the likelihood of disbursements and the likelihood of losses given
Net Interest Income: Net interest income was $13,862 higher in 2011 compared to 2010
disbursement were utilized in determining this contingency. This reserve is reported as a liability
primarily due to improved spread resulting from decreased funding costs. The improvement in
on the balance sheet and totaled $12,000 at December 31, 2011 and $7,000 at both December 31,
spread resulted from callable debt being called and replaced at lower interest rate levels, as well as
2010, and 2009.
some floating rate debt repricing at a lower rate of interest. To a lesser extent, the change in net interest income was also impacted by the composition of the balance sheet and the amount of
The allowance for loan losses (AFLL) increased $15,500 from $111,000 at December 31, 2010 to
equity available for funding loan volume, which was influenced by decreased loan demand in 2011.
$126,500 at December 31, 2011. The allowance for loan losses increased $15,000 from $96,000 at
These same factors contributed to the $16,610 increase in net interest income in 2010 compared
December 31, 2009, to $111,000 at December 31, 2010. Specific loan loss reserves at December
to 2009.
31, 2011, 2010, and 2009 totaled $31,679, $32,380, and $52,270, respectively. At December 31, 2011, this reserve is primarily comprised of those agricultural sectors that continue to be impacted by volatility in commodity and input prices, such as dairy, as well as those industries, such as nursery, that are impacted by the overall downturn in the U.S. economy.
9
Influences on net interest income from changes in effective rates on, and volume of, interest-
Noninterest income: The decrease in noninterest income of $8,309 in 2011 when compared to
earning assets and interest-bearing liabilities between the years ended December 31, 2011, and
2010 was primarily due to $9,312 in refunds received in 2010 from the Farm Credit System
2010, and between the years ended December 31, 2010, and 2009, are presented in the following
Insurance Corporation (Insurance Corporation) related to the Farm Credit Insurance Fund
table:
(Insurance Fund). As described in Note 1 to the Consolidated Financial Statements, â&#x20AC;&#x153;Organization and Operations,â&#x20AC;? when the Insurance Fund exceeds the statutory 2.0 percent secure base amount, the Insurance Corporation evaluates the insurance premium assessment rate for Farm Credit System banks and may refund excess amounts. The Insurance Fund ended 2009 above the secure base amount, and consequently in the first quarter of 2010, the Insurance Corporation distributed to Farm Credit entities the excess amount generated in 2009, as well as excess amounts from 2003. In 2011, no similar refunds were received. Operating expense: In 2011, operating expenses increased $4,464 when compared to 2010. Factors contributing to this increase when compared to the previous year were increases in purchased services, furniture and equipment, salaries, and other expenses. Purchased services
Information regarding the average daily balances and average rates earned and paid on our
were higher than the previous year primarily due to a one-time retention payment made to the
portfolio during 2011, 2010, and 2009 are presented in the following table:
former CEO to assist with the transition in 2011, as well as technology related initiatives and services provided by Farm Credit Financial Partners, Inc. Salaries were higher due to normal annual salary increases, one-time payments to selected individuals and retiring senior management, and greater than anticipated payouts related to 2010 performance. Other expense increased over the prior year due primarily to a contingent liability of $2,000 related to state taxes. These expenses were partially offset by a decrease in employee benefits due primarily to a decrease in amortization of past actuarial plan losses on the defined benefit plan. Operating expenses decreased by $7,185 in 2010 compared to 2009. The decrease resulted from reduced insurance premium assessment rates on the Insurance Fund and a decrease in employee benefits. The decrease in employee benefits was primarily due to a reduction in net period benefit costs on the defined benefit pension plan. These positive variances were slightly offset by higher expenses in salaries, purchased services and public and member relations. The increase in salaries was primarily due to additional employees.
Provision for credit losses: In recent years, our charge-offs, nonaccrual loans, and adverse loans have been higher than our historical averages. Borrower distress has led to higher allowance
Other noninterest expense: Noninterest expense increased $4,648 in 2011 when compared to
levels and provisions for credit losses have had a material impact to net income. The larger
2010. The majority of this increase was attributed to losses related to other property owned. In
provision for credit losses the past three years were due to the challenges facing certain
2011, carrying values were reduced on several assets held in other property owned and losses
agricultural sectors, primarily dairy producers. Charge-offs net of recoveries totaled $26,841,
recognized on properties sold throughout the year. In 2009 or 2010, no significant carrying value
$48,056, and $31,381 in 2011, 2010, and 2009, respectively. Given the size of our portfolio, these
adjustments were recorded.
credit losses have remained relatively small.
10
Provision for income taxes: Income tax expense was $3,064 higher than in the previous year
The interest rate gap analysis shown in the following table presents a comparison of interest-
primarily due to increased non-patronage sourced income from our taxable entity and adjustments
earning assets and interest-bearing liabilities in defined time segments at December 31, 2011. The
to our net deferred tax asset. These same reasons contributed to the income tax expense increase
interest rate gap analysis is a static indicator for how we are positioned by comparing the volume
of $5,588 in 2010 when compared to 2009.
of our assets and liabilities that reprice at various time periods in the future. The value of this analysis can be limited given other factors such as the differences between interest rate indices on
Liquidity and Funding Sources
loans and the underlying funding, the relative changes in the levels of interest rates over time, and
The primary source of our liquidity and funding is a direct loan from CoBank which is reported as
financial features included in loans and the respective funding that can impact future earnings and
“Note Payable to CoBank, ACB” on the Consolidated Balance Sheet. As described in Note 7 to the
market value.
Consolidated Financial Statements, “Note Payable to CoBank, ACB,” this direct loan is governed by a general financing agreement and is collateralized by a pledge of substantially all of our assets and is also subject to regulatory borrowing limits. The general financing agreement includes financial and credit metrics that if not maintained can result in increases to our funding costs. The general financing agreement also requires us to comply with Farm Credit Administration regulations regarding liquidity. To meet this requirement, we are allocated a share of CoBank’s liquid assets. We are currently in compliance with the general financing agreement and do not foresee significant issues with obtaining funding or maintaining liquidity. We have a secondary source of liquidity and funding through an uncommitted Federal Funds line of credit with Wells Fargo. The amount available through this line is $75,000 and is intended to provide liquidity for disaster recovery or other emergency situations. At December 31, 2011, no balance was outstanding on this line of credit. Additionally, we have a letter of credit facility with Bank of America to support letters of credit issued on Industrial Revenue Bonds. The total amount available under this facility is $11,088, with $11,000 committed at December 31, 2011.
Asset/Liability Management In the normal course of lending activities, we are subject to interest rate risk. Our asset/liability management objective is monitored and managed within interest rate risk limits designed to target
Given some of the inherent weaknesses with interest rate gap analysis, simulation models are used
reasonable stability in net interest income over an intermediate planning horizon and to preserve a
to develop additional interest rate sensitivity measures and estimates. The assumptions used to
relatively stable market value of equity over the long term. Mismatches and exposure in interest
produce anticipated results are periodically reviewed and models are tested to help ensure
rate repricing and indices of assets and liabilities can arise from product structures, customer
reasonable performance. Various simulations are produced for net interest income and the market
activity, capital re-investment, and liability management. While we actively manage interest rate
value of equity. These simulations help us assess interest rate risk and make adjustments as
risk within the policy limits approved by the Board of Directors through the strategies established
needed to our products and related funding strategies.
by the Asset/Liability Committee (ALCO), there is no assurance that these mismatches and exposures will not adversely impact our earnings and capital. Our overall objective is to develop
Our interest rate risk management Board policy establishes limits for changes in net interest
appropriately priced and structured loan products for our customers’ benefit and fund these
income and market value sensitivities. These limits are measured and reviewed by ALCO monthly
products with a blend of retained earnings and debt obligations.
11
and reported to the Board of Directors at least quarterly. The Board policy limits for net interest
As displayed in the following table, at December 31, 2011, 2010, and 2009, we exceeded the
income and the market value of equity are a negative 15 percent change given a parallel and
minimum regulatory requirements, which are noted parenthetically.
instantaneous shock of interest rates up and down of 2 percent. If the three-month Treasury bill interest rate is less than 4 percent, then the downward shock is equal to one-half of the threemonth Treasury rate. The general financing agreement with CoBank also uses these simulation results to assess our interest rate risk position and whether corrective action is necessary.
Management is not aware of any reasons why our regulatory capital requirements would not be met in 2012. See Note 8 to the Consolidated Financial Statements, “Members’ Equity” for further
The upward and downward shocks reflected in the above table are based on parallel and
discussions of these regulatory ratios.
instantaneous interest rate movements of 1 and 2 percent. Due to extremely low short-term interest rates in 2011, the 1 and 2 percent parallel and instantaneous downward shock scenarios
NORTHWEST FARM CREDIT SERVICES, ACA
cannot be obtained. The downward rate shock in the preceding table was near flat. As of December 31, 2011, all interest rate risk-related measures were within approved policy limits, general financing agreement requirements, and management guidelines.
Members’ Equity We have a capitalization objective to build and retain adequate members’ equity for our continued financial viability and to provide for growth necessary to competitively meet the needs of our customers. In assessing the amount of capital needed, we take into account credit risk, funding and interest rate risks, contingent and off-balance sheet liabilities and other conditions warranting additional capital. As part of our capitalization plan we evaluate the financial benefits and costs of using credit default swaps and other transactions. These transactions protect us against credit losses and enhance our capital ratios. These transactions amortize down so financial benefits diminish over time. Total members’ equity increased $98,918 or 7.4 percent from December 31, 2010 to December 31, 2011. The increase in our capital was primarily due to earnings of $159,156 partially offset by patronage payable of $53,264 and an increase in accumulated other comprehensive loss of $7,006.
12
Phil DiPofi
Tom Nakano
Kevin Riel
President and CEO
Executive VP-CFO
Chair of the Board
March 1, 2012
March 1, 2012
March 1, 2012
NORTHWEST FARM CREDIT SERVICES, ACA
in the circumstances. We believe that our integrated audit provided a reasonable basis for our
REPORT OF INDEPENDENT AUDITORS
opinion. A companyâ&#x20AC;&#x2122;s internal control over financial reporting is a process designed to provide reasonable
To the Board of Directors and Stockholders
assurance regarding the reliability of financial reporting and the preparation of financial statements
of Northwest Farm Credit Services
for external purposes in accordance with generally accepted accounting principles. A companyâ&#x20AC;&#x2122;s internal control over financial reporting includes those policies and procedures that (i) pertain to
In our opinion, the accompanying consolidated balance sheets and the related consolidated
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
statements of income, of changes in members' equity and of cash flows present fairly, in all
and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions
material respects, the financial position of Northwest Farm Credit Services, ACA and its subsidiaries
are recorded as necessary to permit preparation of financial statements in accordance with
(the Association) at December 31, 2011, 2010 and 2009, and the results of their operations and
generally accepted accounting principles, and that receipts and expenditures of the company are
their cash flows for each of the three years in the period ended December 31, 2011, in conformity
being made only in accordance with authorizations of management and directors of the company;
with accounting principles generally accepted in the United States of America. Also in our opinion,
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
the Association maintained, in all material respects, effective internal control over financial
acquisition, use, or disposition of the companyâ&#x20AC;&#x2122;s assets that could have a material effect on the
reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated
financial statements.
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Association's management is responsible for these consolidated financial statements,
Because of its inherent limitations, internal control over financial reporting may not prevent or
for maintaining effective internal control over financial reporting and for its assessment of the
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
effectiveness of internal control over financial reporting, included in the Report on Internal Control
subject to the risk that controls may become inadequate because of changes in conditions, or that
over Financial Reporting appearing in the Association's 2011 Annual Report to Stockholders. Our
the degree of compliance with the policies or procedures may deteriorate.
responsibility is to express an opinion on these financial statements and on the Association's internal control over financial reporting based on our integrated audit. We conducted our integrated audit in accordance with generally accepted auditing standards established by the Auditing Standards Board (United States) and in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
March 1, 2012
perform the integrated audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our integrated audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our integrated audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our integrated audit also included performing such other procedures as we considered necessary
13
NORTHWEST FARM CREDIT SERVICES, ACA
Consolidated Balance Sheet (dollars in thousands) 2011
Decem ber 31,
2010
2009
ASSETS Cash
$
Loans Less: allowance for loan losses Net loans Accrued interest receivable Investment in and receivable from CoBank, ACB
62,188
$
47,229
$
87,172
8,285,356
8,286,216
8,122,932
126,500
111,000
96,000
8,158,856
8,175,216
8,026,932
75,071
76,959
79,795
309,141
306,931
304,254
Other property owned, net
6,211
9,562
524
Premises and equipment, net
9,602
11,392
10,256
Deferred tax asset, net
8,322
9,655
6,651
67,356
68,486
63,860
Other assets Total assets
$
8,696,747
$
8,705,430
$
8,579,444
$
7,058,880
$
7,216,962
$
7,200,573
LIABILITIES Note payable to CoBank, ACB Advance conditional payments and other interest bearing liabilities
56,593
33,145
43,464
Accrued interest payable
28,706
31,443
37,609
114,098
84,328
78,728
7,258,277
7,365,878
7,360,374
13,119
13,087
12,762
Other liabilities Total liabilities Commitments and Contingent Liabilities (Note 14)
MEMBERS' EQUITY Capital stock and participation certificates
(30,052)
(23,046)
(29,097)
Unallocated retained earnings
Accumulated other comprehensive loss, net of tax
1,455,403
1,349,511
1,235,405
Total members' equity
1,438,470
1,339,552
1,219,070
Total liabilities and members' equity
$
The accompanying notes are an integral part of these consolidated financial statements.
14
8,696,747
$
8,705,430
$
8,579,444
NORTHWEST FARM CREDIT SERVICES, ACA
Consolidated Statement of Income (dollars in thousands) For the year ended Decem ber 31 ,
2011
2010
2009
NET INTEREST INCOME Interest income
$
406,091
$
410,055
$
412,705
Interest expense
144,784
162,610
181,870
Net interest income
261,307
247,445
230,835
47,341
63,056
79,381
213,966
184,389
151,454
Patronage income
39,883
38,962
38,061
Financially related services
13,304
14,996
15,933
Loan and other fees
10,669
10,701
10,375
6,176
13,682
4,427
70,032
78,341
68,796
Salaries and employee benefits
64,079
65,449
64,807
Occupancy and equipment expense
10,958
10,036
9,920
Insurance fund premium
4,230
3,587
13,479
Other operating expenses
34,510
30,241
28,292
4,765
117
19
118,542
109,430
116,517
165,456
153,300
103,733
6,300
3,236
(2,352)
Provision for credit losses Net interest income after provision for credit losses NONINTEREST INCOME
Other income Total noninterest income NONINTEREST EXPENSE
Other expense Total noninterest expenses Income before income taxes Provision/(Benefit) for income taxes Net income
$
159,156
The accompanying notes are an integral part of these consolidated financial statements.
15
$
150,064
$
106,085
NORTHWEST FARM CREDIT SERVICES, ACA
Consolidated Statement of Changes in Membersâ&#x20AC;&#x2122; Equity (dollars in thousands) Capital Stock
BALANCE AT DECEMBER 31, 2008
$
Comprehensive income: Net income Other comprehensive income, net of taxes: Net change in cash flow hedge Amortization of costs included in net periodic pension cost and other actuarial adjustments net of deferred income tax Total comprehensive income Capital stock and participation certificates issued Capital stock and participation certificates retired Patronage distribution BALANCE AT DECEMBER 31, 2009
(34,302)
$
1,155,351
Total M em bersâ&#x20AC;&#x2122; Equity
$
(60)
(60)
5,265
5,265 111,290 1,311 (959) (26,031)
(26,031) $
12,762
$
(29,097)
$
1,235,405
$
150,064 497
497
5,554
5,554 156,115 1,339 (1,014) (35,958)
(35,958) 13,087
$
(23,046)
$
1,349,511
$
159,156 (1,517)
(1,517)
(520)
(520)
(4,969)
(4,969) 152,150 1,222 (1,190) (53,264)
(53,264) 13,119
The accompanying notes are an integral part of these consolidated financial statements.
16
$
1,339,552 159,156
1,222 (1,190) $
1,219,070 150,064
1,339 (1,014) $
1,133,459 106,085
1,311 (959)
Comprehensive income: Net income Other comprehensive income, net of taxes: Net change in cash flow hedges Settlement gain included in net periodic pension income, net of deferred income tax Amortization of costs included in net periodic pension income, net of deferred income tax Total comprehensive income Capital stock and participation certificates issued Capital stock and participation certificates retired Patronage distribution BALANCE AT DECEMBER 31, 2011
$
Unallocated Retained Earnings
106,085
Comprehensive income: Net income Other comprehensive income, net of taxes: Net change in cash flow hedge Amortization of costs included in net periodic pension cost and other actuarial adjustments net of deferred income tax Total comprehensive income Capital stock and participation certificates issued Capital stock and participation certificates retired Patronage distribution BALANCE AT DECEMBER 31, 2010
12,410
Accum ulated Other Com prehensive I ncom e/ (Loss)
(30,052)
$
1,455,403
$
1,438,470
NORTHWEST FARM CREDIT SERVICES, ACA
Consolidated Statement of Cash Flows (dollars in thousands) Year ended December 31,
Cash flows from operating activities: Net income
2011
$
Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses Depreciation/Amortization Net loss on other property owned Net gain on sales of assets Changes in: Accrued interest receivable Accrued interest payable Deferred tax asset Other assets Other liabilities
159,156
2010
$
150,064
2009
$
106,085
47,341 4,920 4,263 (50)
63,056 3,278 37 (282)
79,381 3,497 134 (411)
1,888 (2,737) 1,333 1,422 1,678
2,836 (6,166) (3,004) (7,606) 312
4,535 (21,172) (3,976) (5,626) 7,409
219,214
202,525
169,856
(38,822) (1,810) 270 7,717
(220,763) (680) (4,415) 1,293 1,617
(272,279) (27,823) (3,638) 738 1,492
(32,645)
(222,948)
(301,510)
(158,082) 22,411 1,222 (1,190) (35,971)
16,389 (10,456) 1,339 (1,014) (25,778)
209,779 (21,156) 1,311 (959) (31,115)
(171,610)
(19,520)
157,860
Net increase/ (decrease) in cash
14,959
(39,943)
26,206
Cash at beginning of period
47,229
87,172
Net cash provided by operating activities Cash flows from investing activities: Increase in loans and notes receivable, net Increase investment in CoBank, ACB Fixed asset expenditures Proceeds from sales of fixed assets Proceeds from sales of other property owned Net cash used in investing activities Cash flows from financing activities: Notes payable, net Increase/(Decrease) in advanced conditional payments Other capital issued Other capital retired Distribution of patronage Net cash (used in)/provided by financing activities
Cash at end of period Supplemental schedule of non-cash investing and financing activities: Acquisition of other property owned Net loan charge-offs Premises acquired under capital lease Supplemental non-cash fair values changes related to hedging activities (Decrease)/Increase in interest rate cap and foreign currency hedge Supplemental cash information: Interest paid Income taxes paid
60,966
$
62,188
$
47,229
$
87,172
$
8,629 26,841 1,054
$
10,692 48,056 141
$
825 31,381 -
$
(1,517)
$
497
$
(60)
$
148,423 6,355
$
169,823 7,039
$
204,631 3,304
The accompanying notes are an integral part of these consolidated financial statements.
17
NORTHWEST FARM CREDIT SERVICES, ACA
Northwest FCS, along with other System associations, owns Farm Credit Financial Partners, Inc.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
which provides technology and other operational services to its owners, and AgDirect, which provides point of sale ag equipment financing. The Farm Credit Administration (FCA) is delegated the authority by Congress to regulate the
(dollars in thousands, except as noted)
System banks and associations. The FCA examines the activities of System associations to ensure their compliance with the Farm Credit Act, FCA regulations and safe and sound banking practices.
NOTE 1 > Organization and Operations
The Farm Credit Act established the Farm Credit System Insurance Corporation (Insurance
ORGANIZATION
Corporation) to administer the Farm Credit Insurance Fund (Insurance Fund). The Insurance Fund
Northwest Farm Credit Services, ACA and its subsidiaries, Northwest Farm Credit Services, FLCA
is required to be used (1) to ensure the timely payment of principal and interest on Systemwide
(the Federal Land Credit Association (FLCA)) and Northwest Farm Credit Services, PCA (the
debt obligations (Insured debt), (2) to ensure the retirement of protected borrower capital at par
Production Credit Association (PCA)), (collectively called Northwest FCS) is a member-owned
or stated value, and (3) for other specified purposes. The Insurance Fund is also available for the
cooperative that provides credit and financially related services to or for the benefit of eligible
discretionary uses by the Insurance Corporation of providing assistance to certain troubled System
customers/stockholders primarily in Washington, Oregon, Idaho, Montana and Alaska.
institutions and to cover the operating expenses of the Insurance Corporation. Each System Bank has been required to pay premiums, which may be passed on to the associations, into the
Northwest FCS is a lending institution of the Farm Credit System (the System), a nationwide
Insurance Fund based on its annual average adjusted outstanding insured debt until the monies in
system of cooperatively owned banks and associations, which was established by Acts of Congress
the Insurance Fund reach the â&#x20AC;&#x153;secure base amountâ&#x20AC;?, which is defined in the Farm Credit Act as 2.0
to meet the credit needs of American agriculture and is subject to the provisions of the Farm Credit
percent of the aggregate insured obligations (adjusted to reflect the reduced risk on loans or
Act of 1971, as amended (the Farm Credit Act). At December 31, 2011, the System was comprised
investments guaranteed by federal or state governments) or such other percentage of the
of four Farm Credit Banks, one Agricultural Credit Bank, and numerous associations. With the
aggregate obligations as the Insurance Corporation in its sole discretion determines to be
merger of CoBank, ACB and U.S. AgBank, FCB effective January 1, 2012, the nation is currently
actuarially sound. When the amount in the Insurance Fund exceeds the secure base amount, the
served by three Farm Credit Banks and one Agricultural Credit Bank.
Insurance Corporation is required to reduce premiums, as necessary to maintain the Insurance Fund at the secure base amount. As required by the Farm Credit Act, as amended, the Insurance
CoBank, ACB (the Bank) and its related associations are collectively referred to as the CoBank
Corporation may return excess funds above the secure base amount to System institutions.
District. The Bank provides the majority of funding to associations within the District and is responsible for supervising certain activities of the District Associations. The District consists of the
OPERATIONS
Bank and four ACA parent companies, each having two wholly owned subsidiaries, a FLCA and a
The Farm Credit Act sets forth the types of authorized lending activity, persons eligible to borrow,
PCA. With the merger of CoBank and U.S. Agbank effective January 1, 2012, the District consists
and financial services that Northwest FCS can offer. Northwest FCS is authorized to provide, either
of 27 ACA parent companies and two stand-alone FLCAs.
directly or in participation with other lenders, credit, credit commitments, and related services to eligible customers. Eligible customers include farmers, ranchers, producers or harvesters of aquatic
ACA parent companies provide financing and related services through their FLCA and PCA
products, rural residents, and farm-related businesses.
subsidiaries. The FLCA makes secured long-term agricultural real estate and rural home mortgage loans. The PCA makes short- and intermediate-term loans for agricultural production or operating
Northwest FCS also serves as an intermediary in offering credit life insurance and multi-peril crop
purposes.
insurance and provides additional services to customers such as fee appraisals and financial management services.
18
•
Upon request, stockholders of Northwest FCS will be provided with a free copy of CoBank’s Annual
In a two-statement approach, an entity must present the components of net income and total
Report to Stockholders, which includes the combined financial statements of CoBank and its
net income in the first statement. That statement must be immediately followed by a financial
related associations. Northwest FCS’ financial condition may be impacted by factors that affect
statement that presents the components of other comprehensive income, a total for other
CoBank. CoBank’s Annual Report to Stockholders discusses the material aspects of its financial
comprehensive income, and a total for comprehensive income.
condition, changes in financial condition, and results of operations. In addition, the CoBank Annual
This guidance is to be applied retrospectively and is effective for fiscal years, and interim periods
Report identifies favorable and unfavorable trends, significant events, uncertainties, and the
within those years, beginning after December 15, 2011. The adoption of this guidance will not
impact of activities of the Insurance Corporation. The lending and financial services offered by
impact financial condition or results of operations, but will result in changes to the presentation of
CoBank are described in Note 1 of CoBank’s Annual Report to Stockholders.
comprehensive income.
NOTE 2 > Summary of Significant Accounting Policies
In May 2011, the FASB issued guidance entitled, “Fair Value Measurement – Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.”
The accounting and reporting policies of Northwest FCS conform to accounting principles generally
The amendments change the wording used to describe the requirements in U.S. GAAP for
accepted in the United States of America (GAAP) and prevailing practices within the banking
measuring fair value and for disclosing information about fair value measurements. The
industry. The preparation of financial statements in conformity with GAAP requires management to
amendments include the following:
make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates are discussed in these footnotes, as applicable. Actual
1.
results may differ from these estimates.
Application of the highest and best use and valuation premise is only relevant when measuring the fair value of nonfinancial assets (does not apply to financial assets and liabilities.)
Certain amounts in prior years’ financial statements have been reclassified to conform to current 2.
financial statement presentation. The consolidated financial statements include the accounts of
Aligning the fair value measurement of instruments classified within an entity’s shareholders’
Northwest Farm Credit Services, ACA, Northwest Farm Credit Services, FLCA, and Northwest Farm
equity with the guidance for liabilities. As a result, an entity should measure the fair value of
Credit Services, PCA. All significant inter-company transactions have been eliminated in
its own equity instruments from the perspective of a market participant that holds the
consolidation.
instruments as assets. 3.
RECENTLY ISSUED OR ADOPTED ACCOUNTING PRONOUNCEMENTS
Clarifying that a reporting entity should disclose quantitative information about the unobservable inputs used in a fair value measurement that is categorized within Level 3 of
In June 2011, the Financial Accounting Standards Board (FASB) issued guidance entitled,
the fair value hierarchy.
“Comprehensive Income – Presentation of Comprehensive Income.” This guidance is intended to 4.
increase the prominence of other comprehensive income in financial statements. The current
An exception to the requirement for measuring fair value when a reporting entity manages its
option that permits the presentation of other comprehensive income in the statement of changes
financial instruments on the basis of its net exposure, rather than its gross exposure, to those
in equity has been eliminated. The main provisions of the guidance provides that an entity that
risks.
reports items of other comprehensive income has the option to present comprehensive income in
5.
either one or two consecutive financial statements: •
Clarifying that the application of premiums and discounts in a fair value measurement is related to the unit of account for the asset or liability being measured at fair value. Premiums or discounts related to size as a characteristic of the entity’s holding (that is, a blockage
A single statement must present the components of net income and total net income, the
factor) instead of as a characteristic of the asset or liability (for example, a control premium),
components of other comprehensive income and total other comprehensive income, and a
are not permitted. A fair value measurement that is not a Level 1 measurement may include
total for comprehensive income.
19
CASH
premiums or discounts other than blockage factors when market participants would
6.
incorporate the premium or discount into the measurement at the level of the unit of account
Cash, as included in the statement of cash flows, represents cash on hand and on deposit at
specified in other guidance.
banks.
Expansion of the disclosures about fair value measurements. The most significant change will
INVESTMENT SECURITIES
require entities, for their recurring Level 3 fair value measurements, to disclose quantitative
Northwest FCS may hold investments in accordance with mission-related investment and other
information about unobservable inputs used, a description of the valuation processes used by
investment programs approved by the Farm Credit Administration. These programs allow
the entity, and a qualitative discussion about the sensitivity of the measurements. New
Northwest FCS to make investments that further the System’s mission to serve rural America.
disclosures are required about the use of a nonfinancial asset measured or disclosed at fair
Mission-related investments for which Northwest FCS has the intent and ability to hold to maturity
value if its use differs from its highest and best use. In addition, entities must report the level
are classified as held-to-maturity and carried at cost, adjusted for the amortization of premiums
in the fair value hierarchy of assets and liabilities not recorded at fair value but where fair
and accretion of discounts.
value is disclosed.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
The amendments are to be applied prospectively. The amendments are effective during interim
Long-term real estate mortgage loans can have original maturities ranging up to 40 years,
and annual periods beginning after December 15, 2011. The adoption of this guidance will not
although the typical loan is 25 years or less. Substantially all short- and intermediate-term loans
impact the Association’s financial condition or results of operations but will result in additional
for agricultural production or operating purposes have maturities of 10 years or less. Loans are
disclosure requirements.
carried at their principal amount outstanding adjusted for charge-offs, deferred loan fees or costs, and purchase premiums or discounts. Loan origination fees and direct loan origination costs are
In January 2011, the FASB issued guidance entitled, “Deferral of the Effective Date of Disclosures
capitalized, and the net fee or cost is amortized over the life of the related loan as an adjustment
about Troubled Debt Restructurings.” This guidance temporarily delayed the effective date of the
to yield.
disclosures about troubled debt restructurings required by the guidance previously issued on “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit
Impaired loans are loans for which it is probable that not all principal and interest will be collected
Losses.” The effective date of the new disclosures about troubled debt restructurings (TDR)
according to the contractual terms of the loan and are generally considered substandard or
coincides with the guidance for determining what constitutes a TDR as described below.
doubtful, which is in accordance with the loan rating model, as described below. Impaired loans include nonaccrual loans, restructured loans, and loans past due 90 days or more and still accruing
In April 2011, the FASB issued its guidance entitled, “A Creditor’s Determination of Whether a
interest. A loan is considered contractually past due when any principal repayment or interest
Restructuring is a Troubled Debt Restructuring,” which provides for clarification on whether a
payment required by the loan instrument is not received on or before the due date. A loan shall
restructuring constitutes a TDR. In evaluating whether a restructuring is a TDR, a creditor must
remain contractually past due until it is formally restructured or until the entire amount past due,
separately conclude that both of the following exists: (1) the restructuring constitutes a
including principal, accrued interest, and penalty interest incurred as the result of past due status,
concession, and (2) the debtor is experiencing financial difficulties. For nonpublic entities, the
is collected or otherwise discharged in full.
guidance is effective for annual periods ending on or after December 15, 2012, including interim periods within those annual periods. Northwest FCS elected to adopt the guidance effective for
Impaired loans are generally placed in nonaccrual status when principal or interest is delinquent
periods ending on or before December 15, 2011. The adoption of this Standard did not have an
for 90 days (unless adequately secured and in the process of collection) or circumstances indicate
impact on the Bank and Associations financial condition or results of operations but did result in
that collection of principal and/or interest is in doubt. When a loan is placed in nonaccrual status,
additional disclosures.
accrued interest deemed uncollectible is reversed (if accrued in the current year) and/or charged
20
against the allowance for loan losses (if accrued in the prior year). Loans are charged off at the
The allowance for loan losses is maintained at a level considered adequate by management to
time they are determined to be uncollectible.
provide for probable 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
When loans are in nonaccrual status, the interest portion of payments received in cash are
provisions for loan losses and loan charge-offs. The allowance is based on a periodic evaluation of
recognized as interest income if collection of the recorded investment in the loan is fully expected
the loan portfolio by management in which numerous factors are considered, including economic
and the loan does not have a remaining unrecovered prior charge-off associated with it.
conditions, loan portfolio composition, collateral value, portfolio quality, current production
Otherwise, loan payments are applied against the recorded investment in the loan. Nonaccrual
conditions, and prior loan loss experience. The allowance for loan losses encompasses various
loans may be returned to accrual status when principal and interest are current, the borrower has
judgments, evaluations and appraisals with respect to the loans and their underlying security that,
demonstrated payment performance, there are no unrecovered prior charge-offs, and collection of
by their nature, contain elements of uncertainty and imprecision. Changes in the agricultural
future payments is no longer in doubt. If previously unrecognized interest income exists at the
economy and their impact on borrower repayment capacity will cause these various judgments,
time the loan is transferred to accrual status, cash received at the time of or subsequent to the
evaluations and appraisals to change over time. Accordingly, actual circumstances could vary
transfer is first recorded as interest income until such time as the recorded balance equals the
significantly from Northwest FCS’ expectations and predictions of those circumstances.
contractual indebtedness of the borrower.
Management considers the following factors in determining and supporting the level of allowance for loan losses: the concentration of lending in agriculture combined with uncertainties associated
A restructured loan constitutes a troubled debt restructuring if for economic or legal reasons
with farmland values, commodity prices, exports, government assistance programs, regional
related to the debtor’s financial difficulties Northwest FCS grants a concession to the debtor that it
economic effects and weather-related influences.
would not otherwise consider. Such concessions may include monetary concessions or other modifications to the contractual terms of the loan. If the borrower’s ability to meet the revised
The allowance for loan losses includes components for loans individually evaluated for impairment
payment schedule is uncertain, the loan is classified as a nonaccrual loan.
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
Northwest FCS uses a two-dimensional loan rating model based on internally generated combined
and the present value of the cash flows expected to be collected discounted at the loan’s effective
system risk rating guidance that incorporates a 14-point risk-rating scale to identify and track the
interest rate, or at the fair value of the collateral if the loan is collateral dependent.
probability of borrower default and a separate scale addressing loss given default over a period of time. Probability of default is the probability that a borrower will experience a default within 12
The reserve for unfunded lending commitments is based on management’s best estimate of losses
months from the date of the determination of the risk rating. A default is considered to have
inherent in lending commitments made to customers but not yet disbursed. Factors such as
occurred if the lender believes the borrower will not be able to pay its obligation in full or the
likelihood of disbursal and likelihood of losses given disbursement were utilized in determining this
borrower is past due more than 90 days. The loss given default is management’s estimate as to
contingency.
the anticipated economic loss on a specific loan assuming default has occurred or is expected to INVESTMENT IN COBANK, ACB
occur within the next 12 months.
Northwest FCS' investment in CoBank is in the form of Class A stock. Accounting for this investment is on the cost plus allocated equities basis.
Each of the probability of default categories carries a distinct likelihood of default. There are nine acceptable categories that range from a loan of the highest quality to a loan of minimally acceptable quality. The probability of default between 1 and 9 is very narrow and would reflect
OTHER PROPERTY OWNED
almost no default to a minimal default percentage. The probability of default grows more rapidly as
Other property owned, consisting of real and personal property acquired through foreclosure or
a loan moves from a “9” to other assets especially mentioned and grows significantly as a loan
deed in lieu of foreclosure, is recorded at fair value less estimated selling costs upon acquisition.
moves to a substandard level.
Any initial reduction in the carrying amount of a loan to the fair value of the collateral received is
21
charged to the allowance for loan losses. On at least an annual basis, revised estimates to the fair
Employees who participate in the defined benefit plan also participate in the defined benefit
value less cost to sell are reported as adjustments to the carrying amount of the asset, provided
restoration plan. Each eligible employee whose retirement benefit under the defined benefit plan is
that such adjusted value is not in excess of the carrying amount at acquisition. Income and
limited by Internal Revenue Code Sections 401(a) (17), 415 or any Code provision or government
expenses from operations and carrying value adjustments are included in other income or other
regulations subsequently issued would receive a benefit if these programs are continued. Under
expense, in the Consolidated Statement of Income.
the present plan, the monthly benefit is equal to the difference between the participant’s actual monthly retirement benefit payment under the defined benefit plan and the monthly retirement
PREMISES AND EQUIPMENT
benefit payment that would be payable to the participant under the defined benefit plan if the
Premises and equipment are carried at cost less accumulated depreciation. Land is carried at cost.
limitations of Internal Revenue Code Sections 401(a) (17), 415, or any code provision or
Depreciation is provided on the straight-line method over the estimated useful lives of the assets.
government regulations subsequently issued, did not apply.
Gains and losses on dispositions are reflected in current operations. Maintenance and repairs are All employees of Northwest FCS are eligible to participate in its thrift/deferred compensation plan
charged to operating expense and improvements are capitalized.
(Thrift Plan) whereby employer contributions match a certain percentage of employee INTANGIBLE ASSETS
contributions. Thrift Plan costs are expensed as funded.
Intangible assets are carried at cost less accumulated amortization. Amortization is provided on the straight-line method over the estimated useful life of the intangible assets. The intangible assets
INCOME TAXES
are reviewed annually for impairment with any impairment charges recognized in operating
As previously described, Northwest Farm Credit Services, ACA operates through two wholly owned
expenses.
subsidiaries. The Northwest Farm Credit Services, FLCA subsidiary is exempt from federal and other income taxes as provided in the Farm Credit Act. Northwest Farm Credit Services, ACA and
ADVANCED CONDITIONAL PAYMENTS
its subsidiary, Northwest Farm Credit Services, PCA are subject to federal income tax and pay state
Northwest FCS is authorized under the Farm Credit Act to accept advance payments from
income taxes in Montana and Oregon. Both entities currently operate as cooperatives that qualify
borrowers. To the extent the borrower’s access to such advance payments is restricted, the
for tax treatment under Subchapter T of the Internal Revenue Code. Accordingly, under specified
advanced conditional payments are netted against the borrower’s related loan balance. Amounts in
conditions, they can exclude from taxable income amounts distributed as qualified patronage
excess of the related loan balance are presented in the advance conditional payments and other
refunds in the form of cash, stock, or allocated surplus. Provisions for income taxes are made only
interest-bearing liabilities line in the accompanying Consolidated Balance Sheet. Advanced
on those earnings that will not be distributed as qualified patronage refunds.
conditional payments are not insured. Interest is paid by Northwest FCS on such accounts.
Long-term mortgage lending activities are operated through a wholly owned FLCA subsidiary which is exempt from federal and state income tax. Short- and intermediate-term lending activities are
EMPLOYEE BENEFIT PLANS
operated through a wholly owned PCA subsidiary. Operating expenses are allocated to each
The employees of Northwest FCS participate in its defined benefit retirement plan or its defined
subsidiary based on estimated relative service. All significant transactions between the subsidiaries
contribution retirement plan. Enrollment in the defined benefit plan was curtailed in 1994. Existing
and the parent company have been eliminated in consolidation.
employees who elected to transfer and all new employees hired after December 31, 1994, participate in the defined contribution plan. The defined benefit retirement plan uses the “Entry
Deferred taxes are provided on taxable income on the basis of a proportionate share of the tax
Age Normal Cost” actuarial method for funding purposes and the “Projected Unit Credit” actuarial
effect of temporary differences not allocated in patronage form. A valuation allowance is provided
method for financial reporting purposes. Defined contribution retirement plan costs are expensed
against deferred tax assets to the extent that it is more likely than not (over 50 percent
as funded.
probability), based on management’s estimate, that they will not be realized. The consideration of
22
valuation allowances involves various estimates and assumptions as to future taxable earnings,
to a forecasted transaction, changes in the fair value of the derivative will be deferred and
including the effects of the expected patronage program, which reduces taxable earnings.
reported in accumulated other comprehensive income (loss). The gains and losses on the derivative that are deferred and reported in accumulated other comprehensive income (loss) will
Deferred income taxes have not been provided by Northwest FCS on patronage stock distributions
be reclassified as earnings in the periods in which earnings are impacted by the variability of the
received from the Bank prior to January 1, 1993, the adoption date of the FASB guidance on
cash flows of the hedged item. The ineffective portion of all hedges is recorded in current period
income taxes. Management’s intent is (1) to permanently invest these and other undistributed
earnings. For derivatives not designated as a hedging instrument, the related change in fair value
earnings in the Bank, thereby indefinitely postponing their conversion to cash, or (2) to pass
is recorded in current period earnings.
through any distribution related to pre-1993 earnings to Northwest FCS’ stockholders through
Northwest FCS formally documents all relationships between hedging instruments and hedged
qualified patronage allocations.
items, as well as its risk management objectives and strategies for undertaking hedge transactions.
Northwest FCS has not provided deferred income taxes on amounts allocated to Northwest FCS
This process includes linking all derivatives that are designated as fair-value or cash-flow hedges to
that relate to the Bank’s post-1992 earnings to the extent that such earnings will be passed
(1) specific assets or liabilities on the Consolidated Balance Sheet, or (2) firm commitments or
through to Northwest FCS’ stockholders through qualified patronage allocations. Additionally,
forecasted transactions. Northwest FCS also formally assesses (both at the hedge’s inception and
deferred income taxes have not been provided on the Bank’s post-1992 unallocated earnings. The
on an ongoing basis) whether the derivatives that are used in hedging transactions have been
Bank currently has no plans to distribute unallocated Bank earnings and does not contemplate
highly effective in offsetting changes in the fair value or cash flows of hedged items and whether
circumstances that, if distributions were made, would result in taxes being paid by Northwest FCS.
those derivatives may be expected to remain highly effective in future periods.
PATRONAGE DISTRIBUTIONS FROM COBANK, ACB
COMPREHENSIVE INCOME (LOSS)
Northwest FCS records patronage distributions from CoBank on the accrual basis. CoBank
Comprehensive income (loss) is a measure of all changes in the equity of Northwest FCS as a
distributes patronage 100 percent in cash for its direct lending business. The 2011 requirement for
result of recognized transactions and other economic events of the period other than capital
capitalizing its participation loans sold to CoBank is 8 percent of Northwest FCS’ prior ten-year
transactions with the stockholders. Other comprehensive income (loss) refers to revenue,
average balance of participations sold to CoBank. Under the current CoBank capital plan applicable
expenses, gains and losses that under generally accepted accounting principles are recorded as an
to participations sold, patronage from CoBank related to participations sold is paid 65 percent cash
element of stockholders’ equity but are excluded from net income. Other comprehensive loss is
and 35 percent Class A stock. The capital plan is evaluated annually by CoBank’s Board and
comprised of adjustments related to Northwest FCS’ defined benefit pension and retiree life plans
management and is subject to change.
and to adjustments related to its derivative contracts used to manage interest rate and exchange rate risk on assets.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY In the normal course of business, Northwest FCS enters into derivative financial instruments
FAIR VALUE MEASUREMENTS
(derivatives) that are principally used to manage interest rate and exchange rate risk on assets.
The FASB guidance defines fair value, establishes a framework for measuring fair value, and
Derivatives are recorded on the Consolidated Balance Sheet as assets and liabilities at fair value.
expands disclosures about fair value measurements. It describes three levels of inputs that may be used to measure fair value:
Changes in the fair value of a derivative are recorded in current period earnings or accumulated other comprehensive income (loss) depending on the use of the derivative and whether it qualifies
Level 1 – Quoted prices in active markets for identical assets or liabilities that the reporting entity
for hedge accounting. For fair-value hedge transactions that hedge changes in the fair value of
has the ability to access at the measurement date. Level 1 assets and liabilities include debt and
assets, liabilities, or firm commitments, changes in the fair value of the derivative are recorded in
equity securities and derivative contracts that are traded in an active exchange market, as well as
earnings and will generally be offset by changes in the hedged item’s fair value. For cash flow
certain U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that
hedge transactions, in which Northwest FCS is hedging the variability of future cash flows related
are highly liquid and are actively traded in over-the-counter markets. Also included in Level 1 are
23
assets held in trust funds, which relate to amounts in a deferred compensation and a supplemental
to a third party. These letters of credit are issued to facilitate commerce and typically result in the
retirement plan. The trust funds include investments that are actively traded and have quoted net
commitment being funded when the underlying transaction is consummated between the customer
asset values that are observable in the market place. Pension plan assets that are invested in
and third party. The credit risk associated with commitments to extend credit and commercial
equity securities, including mutual funds, and fixed-income securities that are actively traded are
letters of credit is essentially the same as that involved with extending loans to customers and is
also included in Level 1.
subject to normal credit policies. Collateral may be obtained based on management’s assessment of the customer’s creditworthiness.
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
NOTE 3 > Loans and Allowance for Loan Losses
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
Northwest FCS’ portfolio is comprised of a wide array of commodities and product offerings. In
exchange-traded instruments, the prices are not current or principal market information is not
order to effectively serve this market, Northwest FCS has specialized staff and financial products
released publicly; (c) inputs other than quoted prices that are observable such as interest rates
for these various markets and commodities. A summary of loans follows:
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. This category generally includes certain U.S. Government and agency mortgage-backed debt securities, corporate debt securities, and derivative contracts. Pension plan assets that are derived from observable inputs, including corporate bonds and mortgage-backed securities are reported in Level 2. Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities are considered Level 3. These unobservable inputs reflect the reporting entity’s own assumptions about assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose value is 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. This category generally includes certain private equity
Northwest FCS may purchase or sell participation interests with other parties in order to diversify
investments, retained residual interests in securitizations, asset-backed securities, highly structured
risk, manage loan volume and comply with Farm Credit Administration regulations. The following
or long-term derivative contracts, certain loans and other property owned. Pension plan assets
table presents information regarding participations purchased and sold as of December 31, 2011:
such as certain mortgage-backed securities that are supported by little or no market data in determining the fair value are included in Level 3. The fair value disclosures are presented in Note 10, Note 13, and Note 15. OFF-BALANCE SHEET CREDIT EXPOSURES Commitments to extend credit are agreements to lend to customers, generally having fixed expiration dates or other termination clauses that may require payment of a fee. Commercial letters of credit are conditional commitments issued to guarantee the performance of a customer
24
Loan volume by state at December 31 is as follows:
Northwest FCS' concentration of credit risk in various agricultural commodities and industries is shown in the following table. While the amounts represent Northwest FCS' maximum potential credit risk as it relates to recorded loan principal, a substantial portion of Northwest FCS' lending activities is collateralized and exposure to credit loss associated with lending activities is reduced accordingly. An estimate of the credit risk exposure is considered in the determination of the allowance for loan losses.
Impaired loans are loans for which it is probable that all principal and interest will not be collected according to the contractual terms. The following table presents information relating to impaired loans:
The amount of collateral obtained, if deemed necessary upon extension of credit, is based on managementâ&#x20AC;&#x2122;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 inventories and receivables. Long-term real estate loans are secured by first liens on the underlying real property. Federal regulations state that long-term real estate loans are not to exceed 85 percent (97 percent if guaranteed by a government agency) of the propertyâ&#x20AC;&#x2122;s appraised value. However, a decline in a propertyâ&#x20AC;&#x2122;s market value subsequent to loan origination or advances, or other actions necessary to protect the financial interest of Northwest FCS in the collateral, may result in loan to value ratios in excess of the regulatory maximum.
25
•
Commitments to lend additional funds to debtors whose loans were classified as impaired at
Substandard – assets exhibit some serious weakness in repayment capacity, equity, and/or collateral pledged on the loan,
December 31, 2011, 2010, and 2009 totaled $15,023, $20,479, and $15,616, respectively. •
Doubtful – assets exhibit similar weaknesses to substandard assets; however, doubtful assets
Nonperforming assets, including related accrued interest, and related credit quality statistics are as
have additional weaknesses in existing factors, conditions and values that make collection in
follows:
full highly questionable, and •
One credit quality indicator utilized by the Bank and Associations is the Farm Credit Administration Uniform Loan Classification System that categorizes loans into five categories. The categories are defined as follows: •
Acceptable – assets are expected to be fully collectible and represent the highest quality,
•
Other assets especially mentioned (OAEM) – assets are currently collectible but exhibit some potential weakness,
26
Loss – assets are considered uncollectible.
The following table shows loans and related accrued interest classified under the Uniform Loan
The following tables provide an aging analysis of past due loans and accrued interest as of
Classification System as a percentage of total loans and related accrued interest receivable by loan
December 31:
type as of December 31:
Note: The recorded investment in the receivable is the face amount increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges, or acquisition costs and may also reflect a previous direct write-down of the investment.
A restructuring of a debt constitutes a troubled debt restructuring if the creditor for economic or legal reasons related to the debtorâ&#x20AC;&#x2122;s financial difficulties grants a concession to the debtor that it would not otherwise consider.
27
The following table presents additional information regarding troubled debt restructurings that occurred during the year ended December 31, 2011:
Note: Pre-modification represents the recorded investment just prior to restructuring and post-modification represents the recorded investment immediately following the restructuring.
During 2011, troubled debt restructurings that occurred within the previous 12 months and for which there was a subsequent payment default during the period totaled $3,283, all classified as production and intermediate term. Additional impaired loan information as of December 31, 2011 and 2010 is as follows:
Interest income on nonaccrual and accruing restructured loans that would have been recognized under the original terms of the loans were as follows:
28
A summary of the changes in the allowance for credit losses and the ending balance of loans and accrued interest outstanding as of December 31, 2011 and 2010 is as follows:
Allowance for Credit Losses: Balance at January 1, 2011
Production and intermediate-term
Real estate mortgage
$
Charge-offs Recoveries Provision for loan losses
16,955
$
80,549
Rural residential real estate
Agribusiness
$
10,051
$
2,569
Energy
$
839
Communications
$
-
Other
$
37
Total
$
111,000
(1,262)
(24,130)
(3,852)
(2,244)
-
-
-
9
4,638
-
-
-
-
-
(31,488) 4,647
8,156
27,086
5,915
3,534
1,918
699
33
47,341
Transfers (to)from reserve for
(1,105)
unfunded commitments
(3,214)
(482)
(141)
(45)
(8)
(5)
(5,000)
$
22,753
$
84,929
$
11,632
$
3,718
$
2,712
$
691
$
65
$
126,500
$
5,260
$
23,916
$
321
$
2,182
$
-
$
-
$
-
$
31,679
$
22,753
$
84,929
$
11,632
$
3,718
$
2,712
$
691
$
65
$
126,500
$
89,752
$
135,649
$
2,564
$
14,873
$
201
$
-
$
-
$
243,039
Total loans outstanding at December 31, 2011
$
3,683,808
$
3,112,793
$
699,220
$
727,733
$
103,224
$
25,300
$
8,349
$
8,360,427
Allowance for Credit Losses:
Real estate mortgage
$
96,000
Balance at December 31, 2011 Ending balance: Allowance individually evaluated for impairment Ending balance: Allowance collectively
17,493
evaluated for impairment Balance at December 31, 2011
61,013
11,311
1,536
2,712
691
65
94,821
Recorded Investments in Loans Outstanding: Ending balance: Loans individually evaluated for impairment Ending balance: Loans collectively
3,594,056
evaluated for impairment
Balance at January 1, 2010
$
Charge-offs Recoveries Provision for loan losses
8,544
2,977,144
696,656
Production and intermediate-term
$
69,382
712,860
Rural residential real estate
Agribusiness
$
7,970
103,023
$
827
25,300
Energy
$
9,261
8,349
Communications
$
-
8,117,388
Other
$
16
Total
(681)
(45,393)
(2,023)
(808)
(6,465)
-
-
64
7,143
-
73
34
-
-
(55,370) 7,314
9,028
49,417
4,104
2,477
(1,991)
-
21
63,056
Transfers (to)from reserve for
-
unfunded commitments Balance at December 31, 2010
-
-
-
-
-
-
-
$
16,955
$
80,549
$
10,051
$
2,569
$
839
$
-
$
37
$
111,000
$
3,812
$
26,437
$
275
$
1,856
$
-
$
-
$
-
$
32,380
$
16,955
$
80,549
$
10,051
$
2,569
$
839
$
-
$
37
$
111,000
$
80,671
$
172,093
$
4,530
$
13,863
$
4,781
$
-
$
-
$
275,938
$
3,662,495
$
3,228,116
$
735,945
$
681,728
$
39,257
$
-
$
15,634
$
8,363,175
Ending balance: Allowance individually evaluated for impairment Ending balance: Allowance collectively
13,143
evaluated for impairment Balance at December 31, 2010
54,112
9,776
713
839
-
37
78,620
Recorded Investments in Loans Outstanding: Ending balance: Loans individually evaluated for impairment Ending balance: Loans collectively
3,581,824
evaluated for impairment Total loans outstanding at December 31, 2010
3,056,023
731,415
29
667,865
34,476
-
15,634
8,087,237
by Northwest FCS. Northwest FCS capitalized costs at the establishment of the credit default swap
A summary of the changes in the reserve for unfunded lending commitments follows:
of $1,601. These capitalized costs are included in other assets and are amortized over the expected remaining life of the loans under the agreement. Fees related to the credit default swap are paid based on the volume of loans under the agreement over the life of the agreement. Fees and the amortization of capitalized costs of $1,773, $2,009, and $2,145 for the years ended December 31, 2011, 2010 and 2009, respectively, are classified as noninterest expense. During June 2004, Northwest FCS entered into a credit default swap with Mt. Spokane 2004-A LLC To mitigate the risk of loans being placed in nonaccrual status, Northwest FCS had entered into
(2004 LLC). The balance of the loans under the credit default swap was $194,356, $243,944, and
long-term standby commitments to purchase agreements with the Federal Agricultural Mortgage
$293,446 at December 31, 2011, 2010, and 2009, respectively. Pursuant to the credit default
Corporation (Farmer Mac). The agreements, which were effectively credit guarantees that
swap, following the occurrence of a known loss, the 2004 LLC will be required to pay an amount to
remained in place until the loans were paid in full, gave Northwest FCS the right to sell the loans
Northwest FCS equal to the principal amount of the defaulted loan plus covered interest and costs
identified in the agreements to Farmer Mac after four months of delinquency. Loans and related
less any recoveries. The credit default swap agreement will remain in place over the life of the
accrued interest sold to Farmer Mac at December 31, 2011, 2010, and 2009, were $0, $200, and
loans under the credit default swap. The maximum amount of losses the 2004 LLC will be required
$0, respectively. The balance of the loans under the long-term standby commitments was $0,
to pay under the credit default swap as of December 31, 2011, is $17,933. As of December 31,
$78,903, and $101,763 at December 31, 2011, 2010, and 2009, respectively. Fees for such
2011, $259 of losses have been incurred by the 2004 LLC. Northwest FCS capitalized costs at the
commitments totaled $864, $415, and $525 for the years ended December 31, 2011, 2010, and
establishment of the credit default swap of $2,318. These capitalized costs are included in other
2009, respectively. These amounts are classified as noninterest expense. In December 2011,
assets and are amortized over the expected remaining life of the loans under the agreement. Fees
Northwest FCS and Farmer Mac agreed to terminate the aforementioned agreement without
related to the credit default swap are paid based on the volume of loans under the agreement over
further obligation by either party. Northwest FCS paid Farmer Mac $550 as part of the termination
the life of the agreement. Fees and the amortization of capitalized costs of $812, $996, and $1,298
agreement, which is included in the 2011 fees mentioned above.
for the years ended December 31, 2011, 2010, and 2009, respectively, are classified as noninterest expense.
During August 2007, Northwest FCS entered into a credit default swap with Mt. Spokane 2007-A LLC (2007 LLC). The balance of the loans and accrued interest under the credit default swap was
During 2002, Northwest FCS entered into a credit default swap with Mt. Spokane Trust 2002-A
$575,061, $663,426, and $757,824 at December 31, 2011, 2010, and 2009, respectively. Pursuant
(Trust). The balance of the loans under the credit default swap was $71,356, $93,869, and
to the credit default swap, following the occurrence of a known loss, the 2007 LLC will be required
$120,931 at December 31, 2011, 2010, and 2009, respectively. Pursuant to the credit default
to pay an amount to Northwest FCS equal to the principal amount of the defaulted loan plus
swap, following the occurrence of a known loss, the Trust will be required to pay an amount to
covered interest and costs less any recoveries. However, the 2007 LLC is not required to pay
Northwest FCS equal to the principal amount of the defaulted loan plus covered interest less any
Northwest FCS until the Retained First Loss Notional Amount held by Northwest FCS is reduced to
recoveries. The credit default swap agreement will remain in place over the life of the loans under
zero. In addition to loss events, proportionate reductions in the Retained First Loss Notional
the credit default swap. The maximum amount the Trust will be required to pay under the credit
Amount will occur due to reductions of the Aggregate Notional Amount of the Reference
default swap as of December 31, 2011, is $6,646. As of December 31, 2011, $26 of losses have
obligations associated with non-loss events such as repayment of loan principal. The balance of
been incurred by the Trust. Northwest FCS capitalized costs at the establishment of the credit
the Retained First Loss Notional Amount at December 31, 2011, was $3,476. The credit default
default swap of $2,618. These capitalized costs are included in other assets and are amortized
agreement will remain in place over the life of the loans under the credit default swap. The
over the expected remaining life of the loans under the agreement. Fees related to the credit
maximum amount of losses the 2007 LLC will be required to pay under the credit default swap as
default swap are paid based on the volume of loans under the agreement over the life of the
of December 31, 2011, is $22,588. As of December 31, 2011, $233 of losses have been incurred
30
agreement. Fees and the amortization of capitalized costs of $382, $488, and $602 for the years
from CoBank related to these participations sold is paid 65 percent cash and 35 percent Class A
ended December 31, 2011, 2010, and 2009, respectively, are classified as noninterest expense.
stock. The capital plan is evaluated annually by CoBank’s board and management and is subject to change.
Mt. Spokane Trust 2002-A and Mt. Spokane 2004-A, LLC are variable interest entities created by Bank of America to acquire eligible securities, which will be used as collateral to secure the Failure
The investment in CoBank is carried at cost plus allocated equity in the accompanying
to Pay Credit Event payment of the Trust or LLC under a credit default swap with Northwest FCS.
Consolidated Balance Sheet. Estimating the fair value of Northwest FCS’ investment in CoBank is
The securities are held in the form of direct obligations of, and obligations fully guaranteed as to
not practicable because the stock is not traded. The Association owns approximately 19 percent of
timely payment of principal and interest by, the United States of America, obligations of the
the issued stock of CoBank as of December 31, 2011. As of that date, CoBank’s assets totaled
Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Federal Home
$63.3 billion and members’ equity totaled $4.9 billion. CoBank’s earnings were $707 million during
Loan Bank or obligations of any agency or instrumentality of the United States of America the
2011.
obligations of which are backed by the full faith and credit of the United States of America. Mt. Spokane 2007-A LLC is also a variable interest entity created by Lehman Brothers to acquire
Patronage income received from CoBank is recorded on the accrual basis based on estimated
eligible securities, which will be used as collateral to secure the Failure to Pay Credit Event
amounts. The difference between the estimated accrual and the actual patronage received is
payment of the LLC under a credit default swap with Northwest FCS. The bankruptcy of Lehman
reflected in noninterest income in the year received. Northwest FCS recognized patronage income
Brothers in 2008 did not have an economic impact on the LLC. The securities are limited to direct
of $38,077, $37,454, and $36,868 for the years ended December 31, 2011, 2010, and 2009,
obligations of, and obligations fully guaranteed as to timely payment of principal and interest by,
respectively.
the United States of America or obligations of any agency or instrumentality of the United States of America, the obligations of which are backed by the full faith and credit of the United States of
The target investment rate for each customer is determined annually by the CoBank Board of
America. Eligible securities, however, will not include “real estate mortgages” (or interest therein)
Directors. The target level for associations in 2011 for funds borrowed is within the range of 4-6
as defined in Section 7701(i) of the Internal Revenue Code and the accompanying United States
percent of the prior year average borrowings as specified in the Bylaws (currently 4 percent) and
Treasury Regulations. Management has evaluated these variable interest entities and concluded
the target level for participation loans sold is in the range of 7-13 percent of the prior ten-year
that they are not subject to consolidation.
average balance of participations sold to CoBank as specified in the Bylaws (currently 8 percent).
NOTE 4 > Investment in CoBank, ACB
The lending bank may require the holders of its equities to subscribe for such additional capital as may be needed by the Bank to meet its capital requirements or its joint and several liability under
At December 31, 2011, Northwest FCS’ investment in CoBank is in the form of Class A stock with a
the Act and regulations. In making such a capital call, the Bank shall take into account the financial
par value of $100 per share. Northwest FCS is required to own stock in CoBank for two purposes.
condition of each such holder and such other considerations, as it deems equitable.
One, to capitalize its direct loan from CoBank and two, to capitalize participation loans sold to CoBank. The current requirement for capitalizing its direct loan from CoBank is 4 percent of Northwest FCS’ prior year average borrowings. If the actual stock investment exceeds the required stock investment, then CoBank compensates Northwest FCS for any excess stock invested. If the actual stock investment is less than the required stock investment, then Northwest FCS is required to purchase the shortfall amount. CoBank distributes patronage for its direct lending business 100 percent in cash. The 2011 requirement for capitalizing its patronage-based participation loans sold to CoBank is 8 percent of Northwest FCS’ prior ten-year average balance of such participations sold to CoBank. Under the current CoBank capital plan applicable to such participations sold, patronage
31
NOTE 5 > Premises and Equipment
NOTE 7 > Note Payable to CoBank, ACB
Premises and equipment consist of the following:
Through the direct note to the bank, Northwest FCS is liable for the following:
Northwest FCSâ&#x20AC;&#x2122; indebtedness to CoBank represents borrowings by Northwest FCS to fund its loan portfolio. Under terms of a financing agreement with CoBank, which provides Northwest FCS an open-end revolving line of credit and other term structures, loans made by Northwest FCS, as well
Northwest FCS is obligated under various noncancellable operating leases. Certain office space and
as substantially all of its assets, are assigned to CoBank as primary collateral for funds advanced
equipment are leased. Rental expense under these noncancellable operating leases was $6,352,
by CoBank. Each debt obligation has its own term and rate structure. The weighted average
$6,297, and $5,991 for the years ended December 31, 2011, 2010, and 2009, respectively. At
interest rate for all debt was 1.94, 2.08, and 2.32 percent at December 31, 2011, 2010, and 2009,
December 31, 2011, future minimum lease payments for all noncancellable leases are as follows:
respectively. Fixed rate debt and floating rate debt typically have original maturities ranging from 1 to 30 years. Discount notes have maturities from one day to 365 days. The revolving line of credit is renewed annually and is priced at overnight funds. The maturities of debt within the direct note to the Bank as of December 31, 2011 are shown below:
NOTE 6 > Other Property Owned Net losses on other property owned consist of the following:
At December 31, 2011, callable debt was $745,000, with a range of call dates between January 2012 and June 2015.
32
Under the Farm Credit Act, Northwest FCS is obligated to borrow only from CoBank, unless CoBank
loan obligation. Northwest FCS retains a first lien on common stock or participation certificates
gives approval to borrow elsewhere. CoBank, consistent with FCA regulations, has established
owned by its borrowers.
limitations on Northwest FCS’ ability to borrow funds based on specified factors or formulas relating primarily to credit quality and financial condition. At December 31, 2011, Northwest FCS’
Retirement of equities noted above will be at the lower of par or book value, and repayment of a
note payable is within the specified limitations.
loan does not automatically result in retirement of the corresponding stock or participation certificates. Northwest FCS' Board of Directors considers the current and future status of
We have a secondary source of liquidity and funding through an uncommitted Federal Funds line
permanent capital requirements before authorizing any retirement of at-risk equities. Pursuant to
of credit with Wells Fargo. The amount available through this line is $75,000 and is intended to
FCA regulations, should Northwest FCS fail to satisfy its minimum permanent capital requirements,
provide liquidity for disaster recovery or other emergency situations. At December 31, 2011, no
retirements of at-risk equities subsequent to such noncompliance would be prohibited, except for
balance was outstanding on this line of credit. Additionally, we have a letter of credit facility with
retirements in the event of default or loan restructuring.
Bank of America to support letters of credit issued on Industrial Revenue Bonds. The total amount PROTECTED BORROWER STOCK
available under this facility is $11,088, with $11,000 committed at December 31, 2011.
Protection of certain borrower stock (Class B participation certificates) is provided under the Farm
NOTE 8 > Members’ Equity
Credit Act, which requires Northwest FCS, when retiring protected borrower stock, to retire such stock at par value or stated value regardless of its book value. Protected borrower stock includes
A description of Northwest FCS' capitalization requirements, protection mechanisms, regulatory
capital stock and participation certificates issued prior to October 6, 1988. As of December 31,
capitalization requirements and restrictions, and equities are provided next.
2011, Northwest FCS had no remaining protected borrower stock outstanding, as the previous $1 balance was retired during the year.
CAPITAL STOCK AND PARTICIPATION CERTIFIC ATES In accordance with the Farm Credit Act and Northwest FCS’ capitalization bylaws, each borrower is
REGULATORY CAPITALIZATION REQUIREMENTS AND RESTRICTIONS
required to invest in Northwest FCS as a condition of borrowing. Pursuant to provisions of the
The FCA's capital adequacy regulations require Northwest FCS to achieve permanent capital of 7
Farm Credit Act, the System’s minimum initial borrower investment requirement is one thousand
percent of risk-adjusted assets and off-balance sheet commitments. Failure to meet the 7 percent
dollars or 2 percent of the related loan balance on a per customer basis, whichever is less. An
capital requirement can initiate certain mandatory and possibly additional discretionary actions by
initial investment, Class A capital stock (in the case of mortgage or agricultural loans) or
the FCA that, if undertaken, could have a direct material effect on Northwest FCS’ financial
participation certificates (PCs) (in the case of consumer or farm-related business loans), of the
statements. Northwest FCS is prohibited from reducing permanent capital by retiring stock or
lesser of 2 percent of the loan amount or one thousand dollars per customer is currently required
making certain other distributions to stockholders unless prescribed capital standards are met. The
for new loans. The bylaws of Northwest FCS provide its Board of Directors with the authority to
FCA regulations also require additional minimum standards for capital be achieved. These
modify the capitalization requirements for new loans subject to a maximum of 4 percent of the
standards require all System institutions to achieve and maintain ratios of total surplus as a
related loan balance.
percentage of risk-adjusted assets of 7 percent and of core surplus (generally unallocated retained earnings) as a percentage of risk-adjusted assets of 3.5 percent. Northwest FCS’ permanent
Each owner or joint owner of Northwest FCS at-risk Class A voting common stock is entitled to a
capital, core surplus, and total surplus ratios at December 31, 2011, were 13.8 percent, 13.7
single vote, while Northwest FCS Class A participation certificates and Class B participation
percent, and 13.7 percent, respectively. Management is not aware of any reasons why Northwest
certificates convey no voting rights to their owners. Borrowers acquire ownership of capital stock
FCS’ regulatory capital requirements would not be met in 2012.
or participation certificates at the time the loan is made but usually do not make a cash investment. The aggregate par value of the stock is added to the principal amount of the related
An FCA regulation empowers it to direct a transfer of funds or equities by one or more System institutions to another System institution under specified circumstances. Northwest FCS has not
33
been called upon to initiate any such transfers and is not aware of any proposed action under this
Northwest FCSâ&#x20AC;&#x2122; bylaws provide for the payment of patronage distributions. All patronage
regulation.
distributions to eligible stockholders shall be on a proportionate patronage basis as may be approved by Northwest FCSâ&#x20AC;&#x2122; Board of Directors, consistent with the requirements of Subchapter T
DESCRIPTION OF EQUITIES
of the Internal Revenue Code. For the years ending December 31, 2011, 2010, and 2009, the
Northwest FCS is authorized to issue an unlimited number of shares of Class A common stock and
Board approved cash patronage distributions of $53,264, $35,958, and $26,031, respectively.
up to 500 million units of Class A PCs with a par value of 5 dollars per share. Class B PCs with a
Patronage distributions are recorded on the accrual basis, based on estimated amounts. The
par value of 5 dollars per share are no longer being issued, and have all been retired as of
difference between the estimated accrual and the actual patronage distribution is reflected in
December 31, 2011.
retained earnings in the year paid. In December 2011, the Board of Directors of Northwest FCS approved a program to distribute a patronage dividend to its stockholders. The patronage dividend will be declared and accrued in 2012 and paid in 2013.
Class A common stock is at-risk, has voting rights, and may be retired at the discretion of Northwest FCS' Board of Directors and, if retired, shall be retired at its book value, not to exceed
All earnings not distributed as patronage allocations or appropriated for some other purpose are
its par value. At December 31, 2011, there were 2,538,687 shares outstanding with a total par
retained as unallocated retained earnings. At December 31, 2011, all accumulated earnings are
value of $12,693.
retained as unallocated retained earnings.
Class A PCs are at-risk and do not have voting rights. Class A PCs may be retired at the discretion
OTHER ACCUMULATED COMPREHENSIVE INCOME (LOSS)
of Northwest FCS' Board of Directors and, if retired, shall be retired at its book value, not to
Northwest FCS reports accumulated other comprehensive income (loss) as a component of
exceed its par value. At December 31, 2011, there were 85,052 units outstanding with a total par
retained earnings, which is reported net of taxes as follows:
value of $425. Class B PCs are protected, have no voting rights and are retired in the ordinary course of business at par value. At December 31, 2011, there were no units outstanding. Voting common stock is converted to nonvoting common stock two years after the owner of the stock ceases to be a borrower or immediately if the former borrower becomes ineligible to borrow from Northwest FCS. Nonvoting common stockholders are eligible to participate in other services offered by Northwest FCS. Each owner or the joint owners of voting common stock is entitled to a single vote regardless of the number of shares held, while nonvoting common stock and participation certificates provide no voting rights to their owners. Voting stock may not be transferred to another person unless such person is eligible to hold such stock. Losses that result in impairment of capital stock and PCs would be allocated to such equities on a prorated basis. Upon liquidation of Northwest FCS, at-risk capital stock and participation certificates would be utilized as necessary to satisfy any remaining obligations in excess of the amounts realized on the sale or liquidation of assets. Equities protected under the Farm Credit Act would continue to be retired at par or face value.
34
NOTE 9 > Income Taxes
Deferred tax assets and liabilities are comprised of the following:
The provision for income taxes follows:
Northwest FCS recorded a valuation allowance of $25,139, $22,908, and $19,814 during 2011, 2010, and 2009, respectively. Northwest FCS will continue to evaluate the realizability of the
The provision for (benefit from) income tax differs from the amount of income tax determined by
deferred tax assets and adjust the valuation allowance accordingly.
applying the applicable U.S. statutory federal income tax rate to pretax income as follows:
The calculation of tax assets and liabilities involves management estimates and assumptions as to the future taxable earnings. The expected future tax rates are based upon enacted tax laws. Northwest FCS had no uncertain income tax positions to be recognized for the years ended December 31, 2011, 2010, and 2009, respectively. Tax years that remain open for federal and state income tax jurisdictions are 2008 and forward.
NOTE 10 > Employee Benefit Plans Northwest FCS currently has a defined benefit pension plan and a defined contribution retirement plan. All employees of Northwest FCS are covered under one of the plans. Northwest FCS also has a defined benefit restoration plan, which covers certain participants in the defined benefit plan. The Northwest FCS defined benefit pension plan was closed to new participants beginning January 1, 1995. The defined benefit pension plan is noncontributory. Benefits under the defined benefit
35
pension plan are based on salary and years of service. The following tables set forth the
The projected benefit obligation, accumulated benefit obligation and the fair value of plan assets
obligations and funded status of Northwest FCSâ&#x20AC;&#x2122; defined benefit pension plan.
for each of Northwest FCSâ&#x20AC;&#x2122; employee benefit plans are presented in the following table. Each of the plans has an accumulated benefit obligation in excess of plan assets in each of the periods reported:
The funding status and the amounts recognized in the Consolidated Balance Sheet of Northwest FCS for post-retirement benefit plans follows:
The components of net periodic pension expense and other amounts recognized in other comprehensive income as of December 31 are as follows:
36
The estimated net loss and prior service cost for the defined benefit pension plan that will be
The Trustees have developed an asset allocation policy based on plan objectives, characteristics of
amortized from accumulated other comprehensive income into net periodic benefit cost in 2012 is
pension liabilities, capital market expectations and asset-liability projections. The policy is long-
$1,435 and $290, respectively.
term oriented and consistent with the risk exposure. The Trustees review the asset mixes periodically and regularly monitor the portfolios to maintain compliance with pre-established strategic allocation ranges. The asset allocation policy of the pension plan was a target of 70% of
Weighted average assumptions used to determine benefit obligations at December 31:
assets in equity securities, 25% in debt securities and 5% in real estate during 2011. The asset allocation policy of the pension plan for 2012 was changed to a target of 60% of assets in equity securities, 35% in debt securities and 5% in real estate.
Weighted average assumptions used to determine net periodic benefit cost for the years ended
The expected long-term rate of return assumption is determined by the Farm Credit Foundations
December 31:
Plan Sponsor Committee with input from the Trust Committee. The Plan Sponsor Committee is comprised of certain members of senior management and boards of directors of the participating employers. Historical return information to establish a best-estimate range for each asset class in which the plan is invested. The most appropriate rate is selected from the best-estimate range, taking into consideration the duration of plan benefit liabilities and plan sponsor investment policies.
The funding objective of the plans is to provide present and future retirement or survivor benefits for its members by achieving an attractive rate of return, as defined by the plansâ&#x20AC;&#x2122; policy statements, without exposing the plan to undue risk. A Board of Trustees, called the Farm Credit Foundations Trust Committee, comprised of certain members of senior management of the participating employers, supervises the investment assets of the plans on behalf of the employers. The Trustees adopts an asset allocation strategy for each plan that reflects return and risk objectives, plan liabilities, and other factors. The Trustees employ a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. The intent of this strategy is to minimize plan expenses by outperforming plan liabilities over the long run. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and the participating entitiesâ&#x20AC;&#x2122; financial conditions. The investment portfolio contains a diversified blend of equity and fixed income investments. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks as well as growth, value, small, mid, and large capitalizations. Other investment strategies may be employed to gain certain market exposures, reduce portfolio risk, and to further diversify portfolio assets. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies, and monthly and quarterly investment portfolio reviews.
37
The fair values of Northwest FCS’ pension plan assets at December 31, 2011 by asset category are
Unobservable inputs (e.g. a company’s own assumptions and data) and assets measured at NAV
as follows:
per share which we do not have the ability to redeem at NAV per share at the measurement date would be classified as Level 3. All assets are evaluated at the fund level. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
Northwest FCS is expected to contribute $0 to its defined benefit plans in 2012. Employees who do not participate in the defined benefit pension plan participate in the defined contribution retirement plan, which is in accordance with Section 401 of the Internal Revenue Code. The plan requires the employer to contribute three percent of eligible employee compensation for all employees. For eligible employees hired prior to January 1, 2007, an additional 2 percent of compensation in excess of the employee eligible base compensation is contributed into the plan each year. Defined contribution retirement plan expense recorded by Northwest FCS was $1,486, $1,325, and $1,225 in 2011, 2010, and 2009, respectively. There were no significant transfers between Level 1 and Level 2 during the year. All Northwest FCS employees may also participate in a salary deferral plan. For employees Plan assets are diversified into various investment types as shown in the preceding table. An
participating in the defined benefit plan, the salary deferral plan requires Northwest FCS to match
investment consultant is utilized to ensure the diversification of assets. The assets are spread
employee contributions up to a maximum of 100 percent of the employees’ first 2 percent of salary
among numerous fund managers. Diversification is also obtained by selecting fund managers
and 50 percent on the next 4 percent of salary. For employees participating in the defined
whose funds are not concentrated in individual stocks and, for the case of international funds,
contribution plan, the salary deferral plan requires Northwest FCS to match employee contributions
individual countries.
up to a maximum of 100 percent on the employees’ first 6 percent of salary. Employer contributions to the salary deferral plan were $2,182, $2,399, and $2,243 for the years ended
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active
December 31, 2011, 2010, and 2009, respectively.
markets would be classified as Level 1. Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with observable market data would be
The senior officer compensation package, as administered by the Board Compensation Committee,
classified as Level 2. In addition, assets measured at Net Asset Value (NAV) per share and we have
includes a long-term incentive/retention program designed to retain senior management and
the ability to redeem at NAV per share at the measurement date are classified as Level 2.
incent them for achieving certain specified personal and corporate goals. Northwest FCS has
38
established a Rabbi Trust for this plan and therefore accrues for the estimated liability and also
At December 31, 2011, Northwest FCSâ&#x20AC;&#x2122; owned approximately 6 percent of AgDirect, LLP. AgDirect,
records an asset for contributions to cover estimated costs.
LLP provides equipment dealer financing products and is jointly owned by several Farm Credit System entities.
NOTE 11 > Related Party Transactions NOTE 12 > Regulatory Enforcement Matters In the ordinary course of business, Northwest FCS enters into loan transactions with directors,
No FCA regulatory enforcement actions currently exist with respect to Northwest FCS.
their immediate families, and other organizations with which such persons may be associated. Senior officers and their immediate families are precluded from obtaining loans from Northwest
NOTE 13 > Fair Value Measurements
FCS. Such loans are subject to special approval requirements contained in FCA regulations and are made on the same terms, including interest rates and collateral, as those prevailing at the time for
Accounting guidance defines fair value as the exchange price that would be received for an asset
comparable transactions with unrelated borrowers.
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. See Note 2 â&#x20AC;&#x201C; Summary of Significant
Total loans to directors, their immediate families, and other organizations with which they are
Accounting Policies for additional information.
associated at December 31, 2011, amounted to $10,667. During 2011, disbursements of $16,210 were made and repayments totaled $16,412. In the opinion of management, none of these loans
Assets and liabilities measured at fair value on a recurring basis at December 31, 2011, 2010, and
outstanding at December 31, 2011 involved more than a normal risk of collectability.
2009, for each of the fair value hierarchy values are summarized in the following tables:
Northwest FCS also recognized $38,077, $37,454, and $36,868 of equity distributions from CoBank for the years ended December 31, 2011, 2010, and 2009, respectively. Northwest FCS owned approximately 19 percent of the outstanding common stock of CoBank at December 31, 2011. In the normal course of business Northwest FCS purchases loan participations from CoBank and also sells loan participations to CoBank. At December 31, 2011, Northwest FCS had sold participation interests to CoBank totaling $675,104 and had purchased loan participation interests from CoBank totaling $642,493. During 2010, Northwest FCS provided a limited recourse collection guaranty to CoBank covering four participated loans. As of December 31, 2011, there was one remaining loan with an outstanding balance, which totaled $5,743. $757 of unfunded commitments were available for this loan at December 31, 2011. Pursuant to the terms of the transaction, Northwest FCS guaranteed collection of 20 percent of the outstanding balance of the loans over their respective remaining terms. At December 31, 2011, Northwest FCSâ&#x20AC;&#x2122; owned approximately 15 percent of Farm Credit Financial Partners, Inc. Farm Credit Financial Partners, Inc. is a dedicated service corporation that provides information technology solutions for various Farm Credit associations including Northwest FCS.
39
VALUATION TECHNIQUES As more fully discussed in Note 2 â&#x20AC;&#x201C; Summary of Significant Accounting Policies, 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 represent a brief summary of the valuation techniques used by Northwest FCS for assets and liabilities. ASSETS HELD IN NON-QUALIFIED TRUSTS Assets held in trust funds related to deferred compensation and supplemental retirement plans are classified within Level 1. The trust funds include investments that are actively traded and have quoted net asset values that are observable in the marketplace.
The table below represents reconciliations of all Level 3 liabilities measured at fair value on a recurring basis for the years ended December 31, 2011, 2010, and 2009.
DERIVATIVES Exchange-traded derivatives valued using quoted prices would be classified within Level 1 of the valuation hierarchy. However, few classes of derivative contracts are listed on an exchange; thus, the derivative positions are valued using internally developed models that use as their basis readily observable market parameters and are classified within Level 2 of the valuation hierarchy. Such derivatives include interest rate and foreign currency cash flow hedges.
There were no significant transfers between Level 1 and Level 2 during the year.
The models used to determine the fair value of derivative assets and liabilities use an income statement approach based on observable market inputs, primarily the LIBOR swap curve and
Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2011, 2010,
volatility assumptions about future interest rate movements.
and 2009 for each of the fair value hierarchy values are summarized in the following table:
STANDBY LETTERS OF CREDIT Standby letters of credit are classified within Level 3. The fair value of letters of credit approximate the fees currently charged for similar agreements or the estimated cost to terminate or otherwise settle similar obligations. LOANS For certain loans evaluated for impairment under FASB impairment guidance, the fair value is based upon the underlying collateral since the loans are collateral-dependent loans for which real estate is the collateral. The fair value measurement process uses appraisals and other marketbased information, but in many cases it also requires significant input based on managementâ&#x20AC;&#x2122;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
40
hierarchy. When the value of the real estate, less estimated costs to sell, is less than the principal
Northwest FCS also participates in standby letters of credits to satisfy the financing needs of its
balance of the loan, a specific reserve is established.
borrowers. These letters of credit are irrevocable agreements to guarantee payments of specified financial obligations. Standby letters of credit are recorded, at fair value, on the balance sheet of
OTHER PROPERTY OWNED
Northwest FCS. At December 31, 2011, $72,569 of standby letters of credit were outstanding. The
The process for measuring the fair value of other property owned involves the use of appraisals or
standby letters of credit typically have expiration dates of one year or less.
other market-based information. Costs to sell represent transaction costs and are not included as a component of the assetâ&#x20AC;&#x2122;s fair value. As a result, these fair value measurements fall within Level 3
Northwest FCS maintains a contingency reserve for unfunded commitments, which reflects our
of the hierarchy.
best estimate of losses inherent in lending commitments made to customers but not yet disbursed upon. The reserve totaled $12,000 at December 31, 2011 and $7,000 at both December 31, 2010
NOTE 14 > Commitments and Contingencies
and 2009.
Northwest FCS has various commitments outstanding and contingent liabilities.
During 2011, Northwest FCS recorded a contingent liability of $2,000 related to Washington state taxes. Northwest FCS reported the issue to the state and has initiated managed audit proceedings
Northwest FCS may participate in financial instruments with off-balance-sheet risk to satisfy the
to obtain a resolution and determine any amounts potentially owed for periods open within the
financing needs of its borrowers and to manage their exposure to interest-rate risk. These financial
statute of limitations.
instruments include commitments to extend credit and/or commercial letters of credit. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized
In addition, actions are pending against Northwest FCS in which claims for monetary damages are
in the financial statements. Commitments to extend credit are agreements to lend to a borrower as
asserted. Based on current information, management and legal counsel are of the opinion that the
long as there is not a violation of any condition established in the contract. Commercial letters of
ultimate liability, if any resulting there from, would not be material in relation to the financial
credit are agreements to pay a beneficiary under conditions specified in the letter of credit.
position and results of operation of Northwest FCS.
Commitments and letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. At December 31, 2011, $3,364,852 of commitments to
NOTE 15 > Disclosures about Fair Value of Financial Instruments
extend credit and $21,458 of commercial letters of credit were outstanding. Quoted market prices are generally not available for certain System financial instruments, as
Since many of these commitments are expected to expire without being drawn upon, the total
described below. Accordingly, fair values are based on judgments regarding future expected loss
commitments do not necessarily represent future cash requirements. However, these credit-related
experience, current economic conditions, risk characteristics of various financial instruments, and
financial instruments have off-balance-sheet credit risk because their amounts are not reflected on
other factors. These estimates involve uncertainties and matters of judgment, and therefore
the balance sheet until funded. The credit risk associated with issuing commitments is substantially
cannot be determined with precision. Changes in assumptions could significantly affect the
the same as that involved in extending loans to borrowers and management applies the same
estimates.
credit policies to these commitments. Upon fully funding a commitment, the credit risk amounts are equal to the contract amounts, assuming that borrowers fail completely to meet their obligations and the collateral or other security is of no value. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on managementâ&#x20AC;&#x2122;s credit evaluation of the borrower.
41
The next table presents the carrying amounts and estimated fair values of Northwest FCS’ financial
value of the underlying collateral. When the net realizable value of collateral exceeds legal
instruments at December 31, 2011, 2010, and 2009:
obligation for a particular loan, the legal obligation was used for evaluating fair values of the respective loans. The carrying value of accrued interest receivable was assumed to approximate its fair value. ALLOWANCE FOR LOAN LOSSES As discussed in Note 2, the allowance for loan losses represents an estimate of the credit risk in Northwest FCS' loan portfolio. Because the discount rate used to adjust the carrying value of each loan pool to its fair value reflects the credit risk in the loan portfolio, the allowance for loan losses is not considered necessary in determining the fair value of Northwest FCS' financial instruments. ASSETS HELD IN NON-QUALIFIED BENEFITS TRUSTS These assets relate to deferred compensation and supplemental retirement plans. As discussed in Note 13, the fair value of these assets is quoted net asset values. NOTE PAYABLE TO COBANK, ACB
A description of the methods and assumptions used to estimate the fair value of each class of
Notes payable are not all regularly traded in the secondary market and those that are traded may
Northwest FCS' financial instruments for which it is practicable to estimate that value follows:
not have readily available quoted market prices. Therefore, the fair value of the majority of instruments is estimated by calculating the discounted value of the expected future cash flows. To
CASH
the extent that quoted market prices on like instruments are available, the fair value of these
The carrying value is a reasonable estimate of fair value.
instruments is estimated by discounting expected future cash flows based on the quoted market price of similar maturity U.S. Treasury notes, assuming a constant estimated yield spread
LOANS
relationship between Systemwide bonds and notes and comparable U.S. Treasury notes.
Fair value is estimated by discounting the expected future cash flows using Northwest FCS’ current interest rates at which similar loans would be made or repriced to borrowers with similar credit
DERIVATIVE ASSETS AND LIABILITIES
risk. As the discount rates are based on Northwest FCS’ loan origination rates as well as
The fair value of derivative financial instruments is the estimated amount that Northwest FCS
management estimates of credit risk, management has no basis to determine whether the
would receive or pay to replace the instruments at the reporting date. The values are provided by
estimated fair values presented would be indicative of the assumptions and adjustments that a
the Bank based on internal market valuation models.
purchaser of the loans would seek in an actual sale, which could be less. STANDBY LETTERS OF CREDIT For purposes of determining fair value of accruing loans, the loan portfolio is segregated into pools
The fair value of standby letters of credit is based on fees currently charged for similar
of loans with homogeneous characteristics. Expected future cash flows and interest rates reflecting
agreements.
appropriate credit risk are separately determined for each individual pool. For nonaccrual loans, it is assumed that collection will result only from the disposition of the underlying collateral. Fair value of these loans is estimated to equal the aggregate net realizable
42
NOTE 16 > Derivative Instruments and Hedging Activities
Asset-Liability Management Committee (ALCO) as part of the Committee’s oversight of the Association’s asset/liability and treasury functions. The Committee is responsible for approving
Northwest FCS maintains an overall risk management strategy that incorporates the use of
hedging strategies that are developed within parameters established by Northwest FCS’ board of
derivative financial instruments to minimize significant unplanned fluctuations in earnings that are
directors. The resulting hedging strategies are then incorporated into the Association’s overall risk-
caused by interest rate volatility. Our goal is to manage interest rate sensitivity by modifying the
management strategies.
repricing or maturity characteristics of certain balance sheet assets and liabilities. Northwest FCS also maintains a foreign exchange risk management strategy to reduce the impact of foreign
During 2010, Northwest FCS purchased an interest rate cap from CoBank to hedge the potential
currency fluctuations on our foreign currency denominated loan assets. As a result of interest rate
impact of rising interest rates on our floating-rate debt. If the strike rate of the purchased interest
and foreign exchange rate fluctuations, fixed-rate assets and liabilities will appreciate or depreciate
rate cap is exceeded, Northwest FCS will receive cash flows on the derivative to hedge our
in market value. The effect of such unrealized appreciation or depreciation is expected to be
floating-rate funding exposure above such strike levels. The interest rate cap is accounted for as a
substantially offset by gains and losses on the derivative instruments that are linked to these
cash-flow hedge. The cap has a notional amount of $73 million, and was purchased at a trade-date
assets and liabilities. Interest rate and foreign exchange fluctuations also cause interest income
fair value of $1,500. As of December 31, 2011, the cap fair value was $477 and the corresponding
and interest expense of variable-rate assets and liabilities to increase or decrease. The effect of
loss of $1,023 was recorded to accumulated other comprehensive loss. At December 31, 2010, the
this variability in earnings is expected to be substantially offset by gains and losses on the
cap fair value was $1,996 and the corresponding gain of $496 was recorded to accumulated other
derivative instruments that are linked to these assets and liabilities. Northwest FCS considers the
comprehensive loss.
strategic use of derivatives to be a prudent method of managing interest rate and foreign exchange risk, as it prevents earnings from being exposed to undue risk posed by changes in
As of December 31, 2011, Northwest FCS recorded a derivative liability of $293 for its executed
interest rates or foreign exchange rates.
foreign currency forward contracts, with the corresponding offset to accumulated other comprehensive loss adjusted in accordance with accounting guidance on foreign currency
Northwest FCS records derivatives as assets or liabilities at their fair value on the consolidated
translation. The fair value at December 31, 2010, was a derivative liability of $313 with a
balance sheet. Northwest FCS records changes in the fair value of a derivative in current period
corresponding offset to accumulated other comprehensive loss adjusted in accordance with
earnings or accumulated other comprehensive income/(loss), depending on the use of the
accounting guidance on foreign currency translation. The fair value at December 31, 2009, was a
derivative and whether it qualifies for hedge accounting. For cash-flow hedge transactions, in
derivative liability of $176 with a corresponding offset to accumulated other comprehensive loss
which Northwest FCS hedges the variability of future cash flows related to a variable-rate asset or
adjusted in accordance with accounting guidance on foreign currency translation.
liability, changes in the fair value of the derivative are reported in accumulated other comprehensive income/(loss). The gains and losses on the derivatives that Northwest FCS reports in accumulated other comprehensive income/(loss) will be reclassified as earnings in the periods in which earnings are affected by the variability of the cash flows of the hedged item. The ineffective portion of all hedges is recorded in current period earnings. Northwest FCS’ current hedging activities consist of cash-flow hedges with no ineffectiveness. By using derivative instruments, Northwest FCS exposes itself to credit risk and market risk. Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes Northwest FCS, thus creating a performance risk for the Northwest FCS. When the fair value of the derivative contract is negative, Northwest FCS owes the counterparty and, therefore assumes no performance risk. Northwest FCS’ derivative activities are monitored by its
43
NOTE 17 > Quarterly Financial Information (Unaudited)
after provision for credit losses increased as net interest income increased from the first quarter, and the provision for credit losses trended down toward the quarterly average for the year. Third quarter earnings were boosted by continuing strong trends in net interest income, and lower-than-
Quarterly results of operations for the years ended December 31, 2011, 2010, and 2009 follow:
average provision for credit losses. Net income for the fourth quarter was lower when compared to the previous three quarters. A continued increase in net interest income and strong financially related services income were more than offset by a higher-than-average provision for credit losses, increased compensation expenses attributable to year-end bonus programs, and higher public relations and other expenses. Net income was lower in the first quarter of 2009, when compared to the remaining three quarters, due to lower levels of net interest income, a significant provision for loan losses, a higher than normal income tax expense and a lower level of miscellaneous income. Net income was lower in the second quarter of 2009, when compared to the remaining two quarters, due to lower levels of net interest income, another significant provision for loan losses, and lower levels of income attributable to financially related services. A decrease in income tax expense partially offset the negative impact of the above items. Net income was lower in the third quarter, when compared to the fourth quarter, due to a higher provision for loan losses, which was partially offset by a reduction in income tax expense. Net income for the fourth quarter, while significantly higher than previous quarters, was negatively impacted by a provision for loan losses, an increase in salary and benefit expenses primarily due to various year-end bonus programs. These amounts were partially Net income during the first quarter of 2011 was relatively consistent compared to the third and
offset by higher income attributable to financially related services income and an income tax
fourth quarters, as lower net interest income was offset by lower-than-average noninterest
benefit.
expenses during the quarter. During the second quarter, a significantly higher-than-average provision for credit losses was the primary factor causing net income to be lower than in the other
Northwest FCSâ&#x20AC;&#x2122; 2011 Quarterly Reports to Stockholders are available free of charge on request by
three quarters. Quarterly net income was greatest in the third quarter, as positive trends in net
contacting Northwest Farm Credit Services, ACA, P.O. Box 2515, Spokane Washington 99220-2515
interest income continued, along with a reduced provision for income taxes, which were partially
or telephone (509) 340-5300. Northwest FCSâ&#x20AC;&#x2122; 2011 Quarterly Reports to Stockholders are also
offset by increased salaries and benefits expenses. Net income in the fourth quarter followed
available free of charge at any office location or on the internet at www.farm-credit.com. The 2012
trend, as net interest income was similar to that in the third quarter along with increased fee and
Quarterly Reports to Stockholders will be available on approximately May 10, 2012, August 10,
patronage income. Such increases were offset by increased incentive compensation accruals and
2012, and November 9, 2012.
the contingent liability accrual discussed in Note 14.
NOTE 18 > Subsequent Event
Net income during the first quarter of 2010 was higher as compared to the second and fourth quarters largely as a result of an excess refund paid to Northwest FCS by the Farm Credit System
Northwest FCS has evaluated subsequent events through March 1, 2012, which is the date the
Insurance Corporation relating to the Farm Credit Insurance Fund. This item was partially offset by
financial statements were issued or available to be issued.
a higher-than-average provision for credit losses. During the second quarter, net interest income
44
MANAGEMENT’S DISCUSSION AND ANALYSIS
NORTHWEST FARM CREDIT SERVICES, ACA
DISCLOSURE INFORMATION REQUIRED BY FARM CREDIT ADMINISTRATION REGULATIONS (UNAUDITED)
“Management’s Discussion and Analysis” included in this annual report is incorporated herein by reference.
BOARD OF DIRECTORS Corporate Governance
DESCRIPTION OF BUSINESS
The Board of Directors at Northwest FCS is comprised of 14 director positions. Eleven directors are
General information regarding the business is incorporated herein by reference to Note 1 of the
elected by the voting membership. Each represents one of eleven geographic regions that
financial statements included in this annual report.
comprise Northwest FCS’ operating territory. Three directors are appointed by the other members of the Board. Two of these appointed directors are Outside Directors who cannot be customers,
The description of significant developments, if any, is incorporated herein by reference to
stockholders, employees or agents of any Farm Credit Institution. One of these Outside Directors is
“Management’s Discussion and Analysis” of Financial Condition and Results of Operations included
designated as a “financial expert” as defined by FCA Regulation. This director brings not only
in this annual report.
independence but also financial, accounting, and audit expertise to the Board and chairs the Board’s Audit Committee. The other Outside Director position is used to bring independence, an
DESCRIPTION OF PROPERTY
outside perspective and other areas of expertise to enhance Board oversight capabilities. Currently,
Northwest FCS is headquartered in Spokane, Washington. Northwest FCS owns and leases various
both Outside Directors qualify as financial experts and one acts as an alternate to the designated
facilities across the territory it serves, which are described in this annual report.
“financial expert.” The third appointed director position is a stockholder and is intended to help assure representation of market segments not currently represented by a stockholder-elected
LEGAL PROCEEDINGS
director position or to bring desired skills or background to the Board.
Information regarding legal proceedings is incorporated herein by reference to Note 14 of the
Northwest FCS’ Board has a comprehensive director training and development program in place.
financial statements included in this annual report.
This training consists of an annual board self-assessment of its governance practices as well as
DESCRIPTION OF CAPITAL STRUCTURE
several modules of core curriculum offered as part of a new director orientation program. This
Information regarding capital structure is incorporated herein by reference to Note 8 of the
well as to familiarize newer Board members with key areas of financial performance and reporting.
financial statements included in this annual report.
This training commitment involves an expectation of attendance by all directors at both Farm
program is intended to develop an understanding of the roles and responsibilities of a director as
Credit System and non-System meetings, seminars, and conferences. This balance of training
DESCRIPTION OF LIABILITIES
assures not only an understanding of the Farm Credit System, but also exposes Board members to
Information regarding liabilities is incorporated herein by reference to Notes 5, 7, 9, 10, 14, and 16
“Best Practices” of other financial and lending institutions and allows them to benchmark
of the financial statements included in this annual report.
Northwest FCS’ operations against those of other successful lenders.
SELECTED FINANCIAL DATA
The Board is independent of management. The CEO and internal auditor report to the Board and no management or employees may serve as directors. The Board generally has six regularly
“Five Year Summary of Selected Financial Data” included in this annual report is incorporated
scheduled meetings each year, plus conference calls as needed between meetings. One of those
herein by reference.
regularly scheduled meetings is conducted as a comprehensive three-day strategic planning
45
session. The Board has established six committees to provide concentrated focus and expertise in
regulation, and she has been designated as such. Outside Director Julie Shiflett also qualifies as a
particular areas and to enhance the overall efficiency of scheduled Board meetings. All policies and
financial expert and is a designated “alternate” to serve in Ms. Burmeister-Smith’s absence.
substantial contracts or new programs are generally reviewed by one of these committees, with The Audit Committee members are appointed by the Board. All members of the Audit Committee
any actions recommended to the full Board for approval. Each committee created by the Board prepares an Operating Statement outlining the purpose of the committee, its duties,
are independent of management of Northwest FCS. The Audit Committee has unrestricted access
responsibilities, and authorities. Generally, these responsibilities are advisory in nature, with the
to representatives of the Internal Audit department, independent public accountants, and financial
full Board acting on committee recommendations. These Operating Statements are reviewed and
management. Internal Audit department reports directly to this committee.
approved by the full Board at least annually. This committee structure is organized to reflect Northwest FCS’ key financial and operational areas of risk and to enhance the overall effectiveness
This committee assists the Board in fulfilling its oversight responsibility related to accounting
of the Board’s oversight of these areas. This committee structure consists of a Governance, Audit,
policies, internal controls, financial reporting practices, and regulatory requirements. This
Compensation, Risk, Strategic Opportunities, and Reputation Committee. These committees
committee has an Operating Statement detailing its purpose and key objectives, authority,
generally meet as part of regularly scheduled Board meetings and also conduct conference calls as
composition, meeting requirements, and responsibilities. The Operating Statement, among other
needed to carry out their responsibilities between those regular meetings. The following are full
things, gives the committee the authority to hire and compensate the external auditor, approve all
descriptions of those committees:
audit and permitted non-audit services, review the audited financial statements and all public financial disclosures, meet privately with internal and external auditors, and review any complaints
Governance Comm ittee
regarding accounting irregularities and fraud. The Operating Statement is posted on Northwest FCS’ website at www.farm-credit.com.
This committee is made up of the Chair and Vice Chair of the Board as well as the Chair of the Compensation, Reputation, Audit, Risk, and Strategic Opportunities Committees. In years where a
Com pensation Com m ittee
new Board Chair is elected, the prior year’s Board Chair also serves on this committee. The Governance Committee has the authority to review, prioritize, and recommend agenda items for
This committee consists of the Board Chair and Vice Chair, at least one Outside Director, and three
Board meetings and is responsible for all Board policies not assigned to other committees.
to four other Board members selected by the Board Chair and the Outside Director. Neither the
Committee duties also include serving as an Ad Hoc Committee on major System and
CEO nor any member of management can have any involvement in the selection of committee
organizational issues. This committee also oversees the director nomination and Board election
members nor can they participate in any deliberations of the committee on matters relating to
processes, director training, Standards of Conduct, and serves as a Search Committee for
their own compensation.
appointed director positions and CEO transition, if needed. The committee is responsible for reviewing and recommending for full Board approval the
Audit Comm ittee
performance goals for the CEO and the evaluation of the CEO’s performance against those goals. It also recommends to the Board all actions necessary to administer the CEO’s base salary and any
This committee is made up of at least four Board members, including at least one appointed
short-term or long-term incentive awards under the terms of the CEO’s compensation plan. This
Outside Director. All members of the committee are expected to have practical knowledge of
committee is also responsible for recommending to the Board the terms of the senior officers’
finance and accounting, be able to read and have a working understanding of the financial
compensation plan and participation of senior officers in that plan. The Board has delegated to the
statements, or develop that understanding within a reasonable period of time after being
CEO the responsibility to administer the base salaries of those senior officers within Board
appointed to the committee. The director designated as the “financial expert” serves on this
approved guidelines. However, the CEO must review the base salary administration with the
committee and acts as the chair. Outside Director Christy Burmeister-Smith currently serves in this
Compensation Committee before it becomes effective. The committee also reviews and
position. The Board of Directors has determined that Ms. Burmeister-Smith has the qualifications
recommends for Board approval any short- or long-term incentives to be awarded to senior officers
and experience necessary to serve as an audit committee “financial expert,” as defined by FCA
46
under the terms of their compensation plan. The committee is also responsible for director
acts as a resource on matters primarily legislative and regulatory in nature, including monitoring
compensation and for oversight of Northwest FCS’ employees’ salary structure, benefit plans, all
Northwest FCS’ lobby activities, developing recommended positions and legislative priorities and
Board policies applicable to those plans and other human resource matters not specifically
reviewing requests for support for various legislative or regulatory initiatives.
assigned to other committees.
N orthw est FCS Directors R isk Comm ittee
The following presents information regarding the directors of Northwest FCS, including their
This committee provides oversight for the majority of the enterprise risk management practices of
business experience and any business in which they serve on the board of directors or as a senior
the association. This committee reviews credit portfolio policies and management reports that
officer.
monitor compliance with these policies. It also acts on behalf of the Board on certain delegated
Rick Barnes – Callahan, California
credit related matters. The committee reviews and recommends to the full Board for approval underwriting standards and portfolio and lending limit policies, which guide all of Northwest FCS’
Mr. Barnes was elected in 2010 and his term expires in 2015. He operates a cow-calf operation
lending and credit related activities. In addition to monitoring the overall credit characteristics of
with some timber and produces grass hay for the horse market. He is a director of Siskiyou
the industries Northwest FCS serves and the existing portfolio, the committee also reviews and
Resource Conservation District.
recommends to the full Board for approval, certain credit related actions that exceed management’s delegated authority. This committee also oversees key risk areas associated with
Christy Burmeister Smith – Newman Lake, Washington
budget, operating expenses, funding, interest rate, liquidity, capital management as well as those
Ms. Burmeister-Smith was appointed as an outside director in 2010 and her term expires in 2015.
risks associated with its alliance partners and counterparties.
She serves as Chair of the Audit Committee and is the designated “financial expert” on Northwest FCS’ Board. Ms. Burmeister-Smith is Vice President-Controller & Principal Accounting Officer at
Strategic Opportunities Committee
Avista Corp. in Spokane, Washington.
This committee provides oversight in developing and monitoring the association’s strategic and
Drew Eggers – Meridian, Idaho
business plans in accordance with Northwest FCS’ mission, policies and procedures. It is responsible to ensure board planning sessions and that the association’s overall strategic planning
Mr. Eggers was re-elected in 2009 and his term expires in 2014. He serves as Chair of the
processes serve as a foundation for those plans and for exploring and evaluating strategic
Strategic Opportunities Committee. Mr. Eggers raises peppermint, spearmint, sugar beets and
opportunities. This specifically includes evaluating potential benefits, risks and strategies for
winter wheat. Mr. Eggers is Chairman of Leadership Idaho Agriculture Foundation and past
considering opportunities such as emerging technologies, product development, joint ventures,
president of Food Producers of Idaho.
strategic alliances and mergers and acquisitions. The committee also evaluates management’s
Jim Farmer – Nyssa, Oregon
assessment of the association’s internal strengths and weaknesses and external factors such as economic, competitor and political trends. The committee’s authority is generally limited to
Mr. Farmer was elected in 2010 and his term expires in 2015. He operates an irrigated row crop
investigation, development of proposed positions and making recommendations to the full Board
farm and produces onions, wheat, field corn, and dry edible beans for seed. He is the
for approval.
Secretary/Treasurer of Nyssa Rural Fire Protection District. Mark Gehring – Salem, Oregon
R eputation Comm ittee
Mr. Gehring was elected in 2010 and his term expires in 2015. He raises Marionberries,
This committee is responsible for matters impacting Northwest FCS’ image and reputation. This
blackberries and turf grasses for seed. He is Chairman of the Board of RS Growers, Inc. and
includes marketing, legislative, public relations and community/industry involvement and activities.
RainSweet, Inc., a Salem, Oregon fruit and vegetable processor.
The committee also provides oversight of the Local Advisory Committee Program. This committee
47
David Hedlin – Mt. Vernon, Washington
Kevin Riel – Yakima, Washington
Mr. Hedlin was re-elected in 2011 and his term expires in 2016. He serves as Chair of the Risk
Mr. Riel was elected in 2007 and his term expires in 2012. He serves as Chair of the Board and
Committee. Mr. Hedlin raises vegetable seed, pickling cucumbers, pumpkins and wheat and serves
Governance Committee. Mr. Riel raises hops, apples, hay, and Concord grapes and is a member of
on the boards of Northwest Ag Research Foundation, Skagitonians to Preserve Farmland, Skagit
Knights of Columbus, fourth degree, was awarded International Order of the Hop, is a member of
Valley Culinary Arts, Skagit County Farmland Legacy and is Commissioner of Skagit County Dike
National Grape Co-Op, Tree Top Co-Op and Farm Bureau. He is past Chair of the Washington State
District #9.
Hop Commission and past president of the U.S. Hop Research Council. He currently is a board member of Hop Growers of America.
Herb Karst – Sunburst, Montana
Karen Schott – Broadview, Montana
Mr. Karst was elected in 2008 and his term expires in 2013. He is President of Karag, Inc., a family-held corporation that produces wheat, barley, canola, and hay on a 4,300 acre farm. Mr.
Ms. Schott was re-elected in 2011 and her term expires in 2016. She serves as Vice Chair of the
Karst has served on the board of directors for both the National Barley Growers Association and
Board. Ms. Schott raises winter wheat, spring wheat, and peas. She also manages a lease pasture
the National Association of Wheat Growers. He currently serves on the Board of the Farm Credit
operation. Ms. Schott serves as Secretary of the family farming operation, Bar Four F Ranch, Inc.
Council which is the Farm Credit System trade association that handles legislative and regulatory
She is also a member of the advisory committee to the Montana Southern Ag Research Station and
matters.
President of the Broadview Community Center Board.
Ed Malesich – Dillon, Montana
Julie Shiflett – Spokane, Washington
Mr. Malesich was re-elected in 2007 and his term expires in 2012. He operates a commercial cow-
Ms. Shiflett is an Outside Director appointed by the Board. She was appointed in 2008 and her
calf operation and raises wheat, malt barley, and alfalfa hay. Mr. Malesich is Vice Chairman of
term expires in 2013. Ms. Shiflett serves as Chair of the Compensation Committee and has been
Rocky Mountain Supply, a southwest Montana supply cooperative. He is also a new director on the
designated as the alternate to the designated “financial expert” on Northwest FCS’ Board. She is
CHS Board of Directors.
the Executive Vice President and Chief Financial Officer for Red Lion Hotels and founding partner of Northwest CFO, which assists emerging and mid-market companies to increase cash flow,
Bruce Nelson – Spokane, Washington
profitability, sales, and company value.
Mr. Nelson was re-elected in 2009 and his term expires in 2014. He raises several varieties of
Shawn Walters – Newdale, Idaho
wheat, peas, lentils, barley and nursery trees. Mr. Nelson is past president of the Washington
Mr. Walters was re-elected in 2011 and his term expires in 2016. He serves as Chair of the
Wheat Growers Association. In 2011 he served on the Farm Credit Council Board of Directors.
Reputation Committee. Mr. Walters operates a family farm and fresh pack potato facility, grows
Dave Nisbet – Bay Center, Washington
wheat, barley, alfalfa and potatoes. He serves on the Idaho Potato Commission and as a Director of the Enterprise Canal.
Mr. Nisbet is a board appointed stockholder director. He was re-appointed by the board in 2011 and his term expires in 2017. He grows Pacific oysters and owns a shellfish processing plant. Mr.
COMPENSATION OF DIRECTORS
Nisbet is a director of the Pacific Shellfish Institute, Advisory Board Member, Oregon State University Coastal Oregon Marine Experiment Station-COMES, Executive Board Member OSU
Director compensation is under the oversight of the Board’s Compensation Committee. The
Seafood Consumer Center, and member of the Pacific Coast Shellfish Growers Association.
committee conducts periodic director compensation studies to identify current compensation paid to directors of Farm Credit and other similar entities. Based upon these studies, the compensation committee recommends for approval adjustments to director compensation including any pay differentials paid to the chairman or other key board positions. Absent such a study, board policy
48
limits any adjustment to director compensation to the cost of living index published each year by
Information for each director for the year ended December 31, 2011, is as follows:
FCA. Increases to director compensation typically become effective May 1 of each year. Director compensation in 2011 was set at a rate of $47,305 per year for directors. The Board Chair and Chair of the Audit Committee are paid $52,030. This represents an additional 10 percent, which reflects their unique responsibilities and significant additional time demands of these two positions. Director compensation paid annually to all directors was increased effective May 2011 by $744 ($792 in the case of the Chair of the Board and the Chair of the Audit Committee). Each director receives a monthly retainer of $3,942 and the Board Chair and Chair of the Audit Committee receive a monthly retainer of $4,336. No additional per diem is paid for attendance at Northwest FCS meetings or functions. If a director is not able to attend a regular monthly board meeting, then the director only receives the monthly retainer if attendance at or performance of other official business during that month warrant that payment. Directors and senior officers are reimbursed for reasonable travel expenses and related expenses while conducting association business. In addition, directors are allowed to be reimbursed
SENIOR OFFICERS
expenses related to their spouse attending the summer planning session, the December Board
Several senior officers who served during 2009 and 2010 also served in that capacity for a brief
meeting and one national meeting each year. Directors participating in the legislative fly-in to
period in early 2011 as part of a transition team. However, for clarity, listed below with the CEO
Washington D.C. may be reimbursed spouse expenses for attending if their spouse participates in
are the ten senior officers of Northwest FCS who served throughout 2011, including two senior
the actual Congressional visits conducted during the fly-in. In all other cases, spouse expenses are
officers who retired in 2011 and their replacements. These senior officers reported to the CEO and
reimbursed only if attendance at a meeting is preapproved by the Board. The aggregate amount of
were on the Management Executive Committee (MEC) of Northwest FCS. Information is provided
expenses reimbursed to directors in 2011 was $137,382 compared to $156,691* in 2010 and
on the experience of these senior officers, as well as on any business for which they serve on the
$149,148* in 2009. The Board compensation policy is available and will be disclosed to
board of directors or act as a senior officer and the primary business of that organization.
stockholders upon request.
Phil DiPofi, President and CEO
*Prior period disclosures regarding director reimbursements were overstated. The FCA regulation regarding director reimbursements requires disclosure of the aggregate amount of reimbursement for travel, subsistence, and other related expenses for all directors as a group, for each of the last 3 fiscal years. Prior period disclosures included all director related expenses, as opposed to only those reimbursed to directors. Amounts previously disclosed included $326,611 and $309,960 for 2010 and 2009, respectively.
Mr. DiPofi has served as President and CEO since January 1, 2011. Prior to that, he held various senior officer positions with CoBank. Mr. DiPofi currently serves on the Board of Financial Partners, Inc. (FPI). FPI is a technology firm providing technology support for Farm Credit institutions, including Northwest FCS. He also serves on the Board of Second Harvest Food Bank in Spokane. Jim Allen, Senior Vice President-Capital Markets Mr. Allen has served as Senior Vice President-Capital Markets at Northwest FCS since its inception in 1995. He served on the MEC in early 2011 during the management transition and was then reappointed in July 2011, serving the remainder of the year. Prior to that, he held various positions for Northwest FCS since being hired in 1978.
49
Dan Stainbrook, Executive Vice President-Agribusiness
Fred DePell, Executive Vice President-Financial Services Mr. DePell has served as Executive Vice President-Financial Services since 1992. Prior to that, he
Mr. Stainbrook has served as Executive Vice President-Agribusiness since July 2011. Prior to that
held various positions for Northwest FCS since being hired in 1978.
he served as Executive Vice President-Agribusiness and Capital Markets and Executive Vice President-Credit since 1992.
Brent Fetsch, Senior Vice President-Chief Strategy Officer and Chief Information Officer
Tom Tracy, Executive Vice President and General Counsel
Mr. Fetsch has served as Senior Vice President-Chief Strategy Officer and Chief Information Officer
Mr. Tracy served as Executive Vice President and General Counsel since 1989. Mr. Tracy previously
since January 2011. Prior to that, he was Senior Vice President-Community Lending and also held
served on the Board of Governors of the Farm Credit System Captive Insurance Company. This
various positions for Northwest FCS since being hired in 1987.
company offers, administers, and provides access to a broad range of insurance products to Farm Credit entities on a captive basis. He serves on the Plan Sponsor Committee of the Farm Credit
Joan Haynes, Executive Vice President-Corporate Administration
Foundations Consolidated Benefit Plan. This committee oversees the plan design and non-fiduciary
Ms. Haynes served as Executive Vice President-Corporate Administration since 1994. Prior to that,
responsibilities associated with the benefit plans offered by a number of Farm Credit employers.
she held various positions for Northwest FCS. Ms. Haynes retired effective March 31, 2011.
Mr. Tracy also serves on the board of directors of the Spokane, YMCA. Mr. Tracy retired effective April 30, 2011 and was replaced by Mr. Lavin.
Tom Nakano, Executive Vice President-Chief Financial Officer Mr. Nakano has served as Executive Vice President-Chief Financial Officer since October 2004.
Stacy Lavin, General Counsel
Prior to that he was Vice President-Loan Accounting and Operations and held various positions for
Mr. Lavin has served as General Counsel since May 2011. Prior to that, he was Assistant General
Northwest FCS since being hired in 1993. Mr. Nakano serves on the Farm Credit Foundations
Counsel. Mr. Lavin has worked for Northwest FCS since 2001.
Consolidated Benefit Trust Committee. This committee oversees the fiduciary and plan administrative responsibilities of the medical and welfare benefit plans offered by a number of
COMPENSATION OF CEO AND SENIOR OFFICERS
participating Farm Credit employers.
Ex ecutive Com pensation - Sum m ary
Kathy Payne, Executive Vice President-Human Resources and Corporate
The Board’s Compensation Committee is responsible for the oversight of executive compensation,
Administration
including that of the CEO and senior officers. Compensation plans provide for the administration of these senior officers’ base salaries based upon competitive industry survey data and provide
Ms. Payne has served as Executive Vice President-Human Resources and Corporate Administration
opportunities for them to earn both short-term incentive (STI) and long-term incentive (LTI)
since July 2011. Prior to that she served as Executive Vice President-Human Resources and
awards. STI and LTI awards are based upon both the organization’s success and these
Marketing and in a lead position in the Human Resources department since 1992 and various other
participants’ performance as measured by specific predetermined objectives and subjective
positions since being hired in 1988.
financial, operational and individual goals. The LTI portion is also designed to retain these key executives. Under the current plan, the CEO and those senior officers who participate in the LTI
John Phelan, Executive Vice President-Chief Risk Officer
plan forfeit any unpaid LTI awards if they resign their position prior to the third year following that
Mr. Phelan has served as Executive Vice President and Chief Risk Officer since January 2011. Prior
for which the award was made.
to that, he was Senior Vice President-Commercial Lending and held various positions with Northwest FCS since being hired in 1992.
The LTI awards to the CEO and senior officers, once made, are held in trust until they vest and are paid. These funds are subject to market value fluctuations while held in trust and until actually
50
paid. The participants bear the full risk of this market performance. The funds, until paid, are also
awarded points are then added to determine the percentage of the maximum STI which will be
subject to the claims of creditors of Northwest FCS in the event of liquidation.
awarded. In the case of LTI, this same approach is used to measure results against these annual
Three of the senior officers most recently appointed to serve on the MEC do not yet participate in
goals. However, the Board reserves sole discretion in awarding up to 25 percent of the LTI award
the senior officer compensation plans described above and did not participate in the LTI plan in
as described herein.
2011. Their compensation is administered under programs in place for other members of Northwest FCS’ management team. The specifics of these plans vary by participant depending on
The “Short-term Bonus” shown in the table below reflects the STI earned by the CEO in each year.
the nature of their duties and responsibilities. Their base salaries are administered in accordance
The “Deferred Award” shown in the table reflects the LTI award earned by the CEO in each year
with Northwest FCS’ established salary structure and provide the potential to earn short-term
together with any gains or losses incurred on these funds while held in Trust in each of the years
bonus/incentive payments up to a maximum of 40 percent of their base salaries with a target of 32
identified.
percent based upon their accomplishment of predetermined organizational and personal performance goals. In addition, while these three senior officers do not yet participate in the LTI
Because Mr. DiPofi was not able to participate in Northwest FCS’ Defined Benefit Pension Plan, in
plan, they do participate in a retention plan applicable to a number of key employees. This
addition to his compensation outlined above, Northwest FCS makes an annual contribution to his
retention plan is not funded or held in trust but contractually obligates Northwest FCS to make
Non-Qualified Defined Contribution Plan. The amount is equal to 15 percent of the total of his base
future payments in specified amounts. The amounts vary by participant. These payments are paid
salary and short-term incentive each year. It is reported under “Perquisites/Other” in the table
to participants approximately two and a half years following their award. As with the LTI plan,
below.
these senior officers forfeit those retention amounts if they resign prior to being paid. The total base salary, short-term/incentives, and retention payments paid to these three senior officers are
CEO Compensation shown for 2009 and 2010 in the chart below reflects that paid to Mr. Penick,
included in the chart below. It is fully expected that these three senior officers will participate in
President and CEO of Northwest FCS until his retirement on December 31, 2010. Compensation for
the senior officer compensation plan applicable to all senior officers, including the LTI plan, in
the year 2011 reflects that awarded or paid to Mr. DiPofi, who assumed the position of President
2012.
and CEO effective January 1, 2011.
CEO Com pensation
Senior Officer Com pensation
The CEO’s base salary is benchmarked against that paid to CEOs of comparable financial
The compensation plan for senior officers as described above provides for base salaries to be
institutions. In addition, the CEO can earn both STI and LTI awards each year based on specific
administered consistent with competitive financial industry survey data of their position with
and pre-established individual and organizational performance goals. The CEO’s STI potential in
comparable financial institutions. This plan provides senior officers the opportunity to earn a STI of
2011 was a maximum of 60 percent of his base salary, with a target of 30 percent to be awarded
up to a maximum of 50 percent with a target of 30 percent of their base salaries for meeting pre-
for meeting these pre-established goals, and with the opportunity to earn up to an additional 30
established performance goals and the potential to earn an additional 20 percent for exceeding
percent for exceeding those goals. The CEO’s LTI award potential each year is up to a maximum of
those goals. STI awards are paid in a lump sum in cash upon receipt of year-end financial
100 percent of his base salary, with a target of 50 percent to be awarded for meeting these pre-
statements that support those awards. As noted above, three of the more recently appointed
established goals; up to an additional 25 percent for exceeding those goals and with 25 percent
senior officers who do not yet participate in the senior officer compensation plan, nonetheless have
sole discretion retained by the Board to reflect exceptional performance or circumstances.
the opportunity to earn short-term bonuses up to a maximum of 40 percent with a target of 32 percent. As with the senior officer compensation plan as described, these bonuses are awarded
The actual STI award is based upon actual performance in accomplishing these predetermined
based upon achieving specific pre-established performance goals and are paid in cash in a lump
goals. Each goal is given a weighted number of points, the total of all goals equaling 100 percent.
sum once year-end financial and operational performance has been determined.
Actual results then determine the number of points actually awarded for each goal. These total
51
The senior officers who participate in the LTI plan can earn up to a maximum of 25 percent of their base salary. LTI awards, once made, are held in trust and are subject to forfeiture if these senior officers resign within three years following the year the LTI was awarded. Also as noted above, three of the more recently appointed senior officers who do not yet participate in the LTI plan, participate in the retention plan described above. As indicated, the amounts vary, are not held in trust as with the LTI plan and are carried as an obligation of Northwest FCS. These awards are forfeited by these senior officers if they resign prior to payout. STI and LTI are calculated the same for these senior officers as it is for the CEO except that discretion in the LTI award is exercised by the CEO rather than the Board and is limited to 10 percent of the otherwise calculated award. The Board must approve STI and LTI awarded to these senior officers.
* Jay Penick (2009 and 2010 only) and Phil DiPofi (2011 only)
The STI shown in the next table for these senior officers reflects the combined STI earned by
**Deferred Awards – This figure reflects the principal amount of the LTI earned in each of the
these senior officers in each year which is paid to these senior officers in the following year once
three years shown along with gains/losses incurred on the funds held in trust that year. In the
final year-end financial performance has been determined. Included in this figure is the “Short-
case of Senior Officers, this amount also includes the retention award made to those officers who
term Bonus” earned by the three more recently appointed senior officers. The “Deferred Award” in
did not participate in the LTI plan.
this chart reflects the combined LTI awards to the senior officers who participate in the LTI plan in the year they were earned, together with any gains or losses incurred on those LTI awards that
***Perquisites/Other - The CEO is provided a leased vehicle for his business and personal use. The
are held in trust, in the year identified. These LTI awards are subject to market value fluctuations
income related to personal use of this vehicle, as determined by Internal Revenue Service
while held in trust. Therefore, the amount actually paid reflects those gains/losses while held in trust. This amount also includes the actual retention award made to each of the three more
regulations, is included in the CEO’s total compensation. This item includes any cash or non-cash
recently appointed senior officers in the year awarded.
compensation or awards paid to the CEO or these senior officers. In years where the total volume of these perquisites is less than $5,000, no reporting is required. The 2010 figure includes a onetime retention payment made to Mr. Penick to assist with the transition to the new CEO as needed throughout 2011 and the residual value of the leased vehicle that was given to Mr. Penick on his retirement. The 2011 figure includes the income related to Mr. DiPofi’s personal use of the leased vehicle he is provided, and the 15 percent contribution to his nonqualified deferred compensation plan described above. It also includes a portion of his moving and relocation expenses that were “grossed up” to compensate him for the tax impact of those reimbursed expenses. ****The number of senior officers (excluding the CEO) shown in the chart above who served in 2011 was ten; in 2010, was seven and included Mr. DiPofi, who served as COO – President and CEO-elect during the month of December 2010; and, in 2009 was six.
52
The combined LTI awards actually paid to the senior officers (excluding the CEO) were
Compensation paid to officers whose compensation exceeds $50,000 is available and will be
$1,281,804, $265,169 and $238,972 for the years 2011, 2010 and 2009, respectively. These
disclosed to shareholders upon request. Officers are reimbursed for travel expenses and related
reflect long-term awards made in 2007, 2006 and 2005, respectively, that were actually paid out in
expenses while conducting association business.
the years noted and include gains/losses on those amounts while held in trust. This includes the retention payment made to those senior officers who do not participate in the LTI plan. The 2011
TRANSACTIONS WITH SENIOR OFFICERS AND DIRECTORS
figure also includes the complete payout of all LTI awards held in trust for two senior officers who
Information regarding related party transactions is incorporated herein by reference from Note 11
retired in 2011.
to the financial statements included in this annual report.
During 2009 and 2010, there were six employees who also served in senior officer roles as part of
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
a transition plan to facilitate the retirement of Mr. Penick and several other senior officers. They
There were no events during the past five years that are material to evaluating the ability or
did not participate in the senior officer compensation plan or the LTI plan. The base salaries of
integrity of any person who served as a director or senior officer on January 1, 2012, or at any
these six officers were administered through Northwest FCSâ&#x20AC;&#x2122; salary range structure. Salary ranges
time during 2011.
are assigned to these positions based on competitive data for like positions with comparable financial institutions. These senior officers had short-term bonus/incentive potentials that vary and
RELATIONSHIP WITH INDEPENDENT PUBLIC AUDITORS
range from maximums of 30 to 45 percent of each of their base salaries. Several of these senior
There were no changes in independent public auditors since the prior annual report to
officers also participate in various incentive plans, and all participate in a retention program. The
stockholders. In addition to audit services, the independent public auditors,
total payments under the compensation programs they participate in are set out in the next table.
PricewaterhouseCoopers, LLP prepared the 2010 tax returns for Northwest FCS for a fee of
Several of these officers were appointed to the MEC in 2011 and their compensation is included in
$23,341. This non-audit service was approved by the Audit Committee. There were no material
the discussion of senior officer compensation and the related chart above. The remainder of these
disagreements with the independent public accountants on any matter of accounting principles or
employees retain key positions at Northwest FCS but no longer serve as senior officers. As a result
financial statement disclosure during this period.
their compensation is not disclosed for 2011, but as with all highly compensated employees, their AUDIT FEES AND EXPENSES
compensation is available upon request.
Fees and expenses incurred by Northwest FCS for audit services rendered by its independent auditors, PricewaterhouseCoopers, LLP, for the years ended December 31, 2011, 2010 and 2009, were $368,500, $379,500 and $363,000, respectively. These fees and expenses were incurred for the annual financial statement audit, including the audit of internal controls over financial reporting as of December 31, 2011, 2010, and 2009. FINANCIAL STATEMENTS
*Retention - These retention figures reflect the amount awarded to these senior officers in 2010
The financial statements, together with the Report of Independent Auditors dated March 1, 2012,
and 2009. These amounts are held as a general obligation of Northwest FCS and are not subject to
and the Report of Management appearing in this annual report are incorporated herein by
market gains/losses. Therefore, the amount awarded will be the same as the amount actually paid.
reference.
53
RELATIONSHIP WITH COBANK, ACB •
Northwest FCS’ statutory obligation to borrow from CoBank, ACB is discussed in Note 7.
•
CoBank, ACB’s ability to access the capital of Northwest FCS is discussed in Note 4.
•
The major terms of any capital preservation, loss sharing or financial assistance agreements between Northwest FCS and CoBank, ACB are discussed in Notes 1 and 8.
•
A discussion of how the financial condition and results of operations of CoBank, ACB may materially affect stockholder investment in Northwest FCS and Northwest FCS’ investment in CoBank, ACB is discussed in Note 1.
•
CoBank, ACB is required to distribute its annual report to shareholders of Northwest FCS if a “significant event” as defined by FCA regulation occurs.
PRIVACY PROTECTION AFFORDED UNDER FCA REGULATIONS Customer financial privacy and the security of other non-public information are important. Therefore, Northwest FCS holds customer financial and other non-public information in strictest confidence. Federal regulations allow disclosure of such information by Northwest FCS only in certain situations. Examples of these situations include law enforcement or legal proceedings, when such information is requested by a Farm Credit System or other financial institution with which customers do business or consumer reporting agencies.
54
o
NORTHWEST FARM CREDIT SERVICES, ACA
DESCRIPTION AND STATUS REPORT ON THE YOUNG, BEGINNING AND SMALL FARMERS PROGRAM
•
Services Provided There are several credit and other related services offered through the Board approved YBS program directly and in coordination with others that allow Northwest FCS to effectively serve the needs within the young, beginning, and small producer segments:
Northwest FCS has a specific program in place to serve the credit and related needs of young, beginning, and small farmers and ranchers (YBS) in our territory. The definitions of young,
•
beginning, and small farmers and ranchers, as developed by the Farm Credit Administration follow:
•
loan program known as AgVision. AgVision customers account for approximately $200 million
Young – A farmer, rancher, producer or harvester of aquatic products who is age 35 or
of the portfolio loan volume. Through this program, special consideration is given in loan underwriting ratios, interest rate concessions, and origination and appraisal fee waivers. Over
Beginning – Any farmer, rancher, producer or harvester of aquatic products who has 10
$1 million in fee waivers have been provided to AgVision customers since 2001, with over
years or less farming or ranching experience, as of the loan transaction date.
$60,000 in fees waived in 2011.
Small – Any farmer, rancher, producer, or harvester of aquatic products who generates less
•
than $250,000 in annual gross sales of agricultural or aquatic products.
producers are also eligible for the AgVision program. •
M ission Statem ent:
An advisory group comprised of young, beginning, and small farmers and ranchers was created to provide Northwest FCS with customer feedback, function as a liaison to association
To advance young, beginning, and small farmers' success via deliberate strategies in lending and
management, and advance YBS program benefits within the agricultural community.
professional development. •
Objectives of the program :
A portion of the young, beginning, and small loan portfolio is supported by government guarantees, including guarantees by the Farm Service Agency (FSA) and USDA’s Business and
To support agriculture by encouraging competent YBS customers to enter into or remain in
Industry Guaranteed Loan Program.
agriculture by supporting their efforts to do so. •
Small producers are primarily served through Northwest FCS’ Express Financing products. These products are designed with a convenient and efficient delivery method. Small
Mission and Objectives
•
Young, beginning, small, and minority producers who are actively involved in farming and also those who may not meet traditional credit standards are considered under an outreach
younger, as of the loan transaction date. •
To provide adequate Board oversight to ensure the needs of this market are met on a constructive, safe, and sound basis.
Program Definitions
•
Will become profitable customers for the association.
Government Guaranteed Loans to YBS Farmers and Ranchers
To recognize the challenges facing YBS customers attempting to obtain credit and establish a viable enterprise and to establish Northwest FCS as a leader in providing those products and services necessary for them to overcome those challenges.
•
To develop business relationships with next generation producers who: o
Exhibit the management skills necessary to build a solid financial position.
o
Contribute to the agricultural community.
•
More than $380,000 has been reimbursed to customers for education expenses, technology purchases, recordkeeping, and tax planning and preparation services since the 2001 inception of the AgVision program. The reimbursements totaled over $40,000 in 2011.
55
•
Training programs are targeted specifically to young, beginning, and small producers,
producers increased by 2 percent. The number of beginning farmers decreased by 3 percent. The
focusing on areas such as farm economics, financial literacy, profit, cash flow and succession
number of small producers increased by 1 percent.
planning. Several workshops are held in Spanish for the benefit of our minority customers. •
The Northwest FCS’ Business Management Center helps customers assess, understand, and
YBS Volume in the Northwest FCS Portfolio
improve management practices through group and individual interactions via orientations,
The following table outlines the percentage of young, beginning and small producers’ loans in the Northwest FCS loan portfolio as of December 31, 2011, compared to the total number of loans in
workshops, and consulting. Many of our YBS customers have taken part in these various
the portfolio. There are differences in the methods by which the census demographics and the
workshops. •
Northwest FCS’ data are presented. The census data is based on number of producers, while the
Northwest FCS provides donations and sponsors state and local FFA activities and
Northwest FCS’ data is based on number of loans.
conventions, state 4-H activities and conventions, and agricultural leadership and educational programs. •
Young, Beginning, Sm all Farmers and R anchers – N um ber and Volume of Loans Outstanding (Including available com m itm ent)
In 2011, Northwest FCS offered thirty-two $1,500 college scholarships to qualified high school seniors and twelve $1,500 scholarships to college juniors or seniors.
•
Northwest FCS offers many services; including crop insurance, life insurance, and debt protection that help our YBS producers mitigate risk.
Region Demographics The local service area of Northwest FCS primarily includes all counties in the states of Washington, Montana, Oregon, Idaho, and Alaska. The following table presents a comparison of the
Goals & Results
demographic information from the USDA’s 2007 Census of Agriculture for young, beginning, and
Quantitative targets have been established by board policy for young, beginning and small farmers
small producers in the territory to the results of the 2002 census. This census is conducted every
in loan volume and number of loans based upon demographic data. These targets are shown as
five years.
follows:
Census of Agriculture - Young, Beginning, and Sm all P roducers
2011 Young, Beginning and Sm all Service Goals & Results
2007 vs. 2002
The data reveals Northwest FCS met its loan number projections for Young and Beginning producers. Although the data reveals Northwest FCS did not meet its volume projections in all categories, some of this decrease was due to the positive agricultural environment in 2011. The 2007 Census of Agriculture results show an increase in young and small producers and a
Northwest FCS will continue its mission to advance young, beginning, and small farmers through
decrease in beginning producers from 2002 to 2007 in the service area. The number of young
deliberate lending strategies and producer educational opportunities.
56
NORTHWEST FARM CREDIT SERVICES, ACA
LOCAL ADVISORS IDAHO Robert Ball Adrian Boer Doug Carlquist Ray Carlson Bill Clayton Cade Crapo Ron Elkin Carl Ellsworth David Funk LeRoy Funk Brent Griffin Jeff Harper John Hepton Jackie Hillman Ken Koompin Karen Lustig Marty Lux Dan Mader Ray Matsuura Kyle Meyer Ron Mio Greg Moss Kirk Nickerson Jeff Pahl Erick Peterson David Rallison D. Brad Reed Nate Riggers Doug Ruff Royce Schwenkfelder Kirt Schwieder Scott Searle Todd Simmons Robert Swainston Ryan Telford Bernie Teunissen Dale Thomas Steven Toone James Udy Shawn Webster Mike Wheeler Ann T. Wilson Berkley Wray Randy Wheatley
MONTANA Hamer Jerome Eden Blackfoot Wilder St. Anthony Buhl Leadore Hansen Burley Rupert Mountain Home Nampa Dubois American Falls Cottonwood Nezperce Genesee Blackfoot Rathdrum Fruitland Ketchum Howe Pocatello Moscow Franklin Idaho Falls Nez Perce Aberdeen Cambridge Idaho Falls Shelley Terreton Preston Richfield Caldwell Gooding Grace American Falls Rexburg Declo Hammett Blackfoot McCammon
Bill Bergin, Jr. Adam Billmayer Bart Bitz Keven Bradley Tom Cheetham Don Connelly Bret Conover Calvin Danreuther Cory Davis Nels DeBruycker Brian Dice Vicki Eggebrecht Conni French Joe Fretheim Beth Granger Chad Hansen John Helle Courtney Herzog Craig Henke Dale Hirsch Craig Iverson Tim Johnson Del Kamerman Alan Klempel Paul Kronebusch Tim Lake Bill Lauckner, Jr. Kirk Montgomery Bryan Mussard Corie Mydland Tracy Mytty Shawn Rettig Randy Ridgeway Dave Sattoriva Nancy Schlepp Dennis Schmierer Leonard Schock Amy Sinks Kim Skinner Larry Steffes Steve Swank Dale Tarum Bob Taylor Miles Torske Carl Traeholt Brian Tutvedt Larry Tveit, Jr. Bruce Udelhoven Jeff Volf Mike Wallewein Steve Wood
OREGON Melstone Hogeland Big Sandy Cut Bank Redstone Valier Broadview Loma Townsend Choteau Volborg Malta Malta Shelby Great Falls Dillon Dillon Rapelje Chester Kinsey Winnett Dutton Bozeman Bloomfield Conrad Polson Nashua Rosebud Dillon Joliet Florence Rudyard Stanford Hingham Ringling Savage Vida Jordan Hall Plevna Chinook Richland Denton Hardin Wolf Point Kalispell Fairview Winifred Judith Gap Conrad Sheridan
Monet Allen Dwight Arnoldus Ed Bair Lori Baley Tim Bare Glenn Barrett John Boyer Greg Brink Ron Brown Warren Chamberlain Dan Dawson Mike DeWall Susan Doverspike Rod Fessler Joe Finegan Skip Gray Dennis Harmon Ron Hjort Gary Hull Matt Insko Dave Kauer Mark Krautmann David Kunkel Leland Lage Dan C. Lewis Sharon Livingston Bill Martin Scott McClaran Ron Meyer Greg Myers David Neal Mary Olson Larry Parker Alan Parks Vikki Price John Reerslev Jim Schaefer Steven Sugg Anna Sullivan Steve Walker Charlie Waterman Bill Wilber
WASHINGTON Montague, CA Cove Klamath Falls Malin Roseburg Bonanza Haines Joseph Milton-Freewater Vale Roseburg Harrisburg Burns Madras Cornelius Albany Grants Pass Oakland Lebanon LaGrande Amity Salem Portland Hood River Gaston Mt. Vernon Rufus Joseph Talent Tillamook Tangent Monmouth Helix Silver Lake Nyssa Junction City Molalla The Dalles Hereford Stanfield Bandon Burns
Dave Allan Melissa Bedlington-Kleindel Jeff Bosma Russ Byerley Roger Canfield Mike Cobb Bill denHoed Richard DeRuwe Frank DeVries Scott Eschbach Patrick Escure Kevin Filbrun Stacy Gilmore Norm Gutzwiler Lori Hayles Gary Kehl Jim Kile Cris Kincaid Jim Klaustermeyer Dave Klaveano Tristan Klesick Chris Kontos Steve Krupke Josh Lawrence Poppie Mantone Sarah McClure Dan McKay Alan Mesman John Miller Pat Murphy Chuck Podlich Jeff Raap Sara Rolfs Jeff Schilter Danielle Scrupps Ben Smith Mark Tudor Jake Wardenaar Andy Werkhoven Brandy Wigen
Wapato Lynden Outlook Touchet Olympia Ephrata Grandview Dayton Lynden Yakima Quincy Pasco Pasco Malaga Pasco Quincy St. John Pullman Othello Pomeroy Stanwood Walla Walla Reardan Royal City Bingen Walla Walla Almira Mt. Vernon Toledo Chehalis Orondo Ellensburg Wenatchee Olympia Ritzville Sequim Grandview Royal City Monroe Colfax
As of: 3/1/2012
57
NORTHWEST FARM CREDIT SERVICES, ACA
OFFICE LOCATIONS Northwest FCS
IDAHO
MONTANA
OREGON
WASHINGTON
Headquarters
73 Fort Hall Avenue, Suite A American Falls, ID 83211 208-226-1340
Tech Plaza, Building 1, Suite 300 3490 Gable Road Billings, MT 59108 406-651-1670
3370 10th Street, Suite B Baker City, OR 97814 541-524-2920
265 East George Hopper Road Burlington, WA 98233 360-707-2353
2345 NW Amberbrook Drive, Suite 100 Beaverton, OR 97006 503-844-7920
629 South Market Boulevard Chehalis, WA 98532 360-767-1100
650 E Pine, Suite 106A Central Point, OR 97502 541-665-6100
224 North Main Street Colfax, WA 99111 509-397-2840
2911 Tennyson Avenue, Suite 301 Eugene, OR 97408 541-685-6140
667 Grant Road, Suite 1 East Wenatchee, WA 98802 509-665-2160
300 Klamath Avenue, Suite 200 Klamath Falls, OR 97601 541-850-7500
1501 East Yonezawa Blvd Moses Lake, WA 98837 509-764-2700
378 West Idaho Avenue Ontario, OR 97914 541-823-2660
455 Hemlock Street, Suite D Othello, WA 99344 509-488-2396
12 Southwest Nye Pendleton, OR 97801 541-278-3300
9530 Bedford Street Pasco, WA 99301 509-542-3720
3113 S Highway 97, Suite 100 Redmond, OR 97756 541-504-3500
1223 Sheridan Avenue, Suite A Prosser, WA 99350 509-786-6400
2222 NW Kline Street Roseburg, OR 97471 541-464-6700
201 B West Broadway Ritzville, WA 99169 509-659-1105
650 Hawthorn Avenue SE, Suite 210 Salem, OR 97309-9831 503-373-3000
1900 West Nickerson Street, Ste 215 Seattle, WA 98119 206-691-2000
3591 Klindt Drive, Suite 110 The Dalles, OR 97058 541-298-3400
1515 S Technology Blvd, Suite B Spokane, WA 99224 509-340-5600
1700 S. Assembly Street Spokane, Washington 99220 (509) 340-5300
* Northwest FCS Owned
370 North Meridian Street, Suite A Blackfoot, ID 83221 208-782-3800 1408 Pomerelle Avenue, Suite B Burley, ID 83318-2064 208-678-6650
1001 West Oak, Farm Credit Building, Suite 200 Bozeman, MT 59772 406-556-7300 519 South Main Conrad, MT 59425 406-278-4600
501 King Street PO Box 177 Cottonwood, ID 83522 208-962-2280
38 A South Central Avenue Cut Bank, MT 59427 406-873-9070
2225 West Broadway, Suite A Idaho Falls, ID 83402 208-552-2300
134 East Reeder Street Dillon, MT 59725 406-683-1200
2631 Nez Perce Drive, Suite 201 Lewiston, ID 83501 208-799-4800
501 First Avenue South Glasgow, MT 59230 406-228-3900
16034 Equine Drive Nampa, ID 83687 208-468-1600
700 River Drive South Great Falls, MT 59405 406-268-2200
102 North State Preston, ID 83263 208-852-2145
1705 Hwy 2 NW, Suite A Havre, MT 59501 406-265-7878
1036 Erikson Drive Rexburg, ID 83440 208-656-2100
120 Wunderlin Street, Suite 6 Lewistown, MT 59457 406-538-7737
815 North College Road Twin Falls, ID 83303 208-732-1000
502 South Haynes Miles City, MT 59301 406-233-3100
139 River Vista Place, Suite 201 Twin Falls, ID 83301 208-732-1000
3021 Palmer Street, Suite B Missoula, MT 59808 406-532-4900
2735 Allen Road Sunnyside, WA 98944 509-836-3080
123 North Central Avenue Sidney, MT 59270 406-433-3920
*1 West Pine Walla Walla, WA 99362 509-525-2400 *1360 North 16th Avenue Yakima, WA 98902 509-225-3200
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