Northwest Farm Credit Services 2013 Annual Report by Northwest Farm Credit Services

2013 A N N UA L R EP O R T

Preparing the Next Generation of Leadership

Visit us at:

northwestfcs.com

You may receive multiple copies of the annual report due to system changes and the need to send annual financial information to every stockholder of record.

2013 Board of Directors

On Behalf of the Board

Pictured left to right:

Dave Nisbet Bay Center, Washington Drew Eggers Meridian, Idaho John Helle Dillon, Montana Shawn Walters New Dale, Idaho

Investments in youth education, industry associations, sponsorships and our Rural Community Grant Program are making a profound difference in the communities where we live and work.

2013 was another successful year for the association. We posted record net income that provided strong growth in capital, allowing Northwest FCS to strengthen its financial capacity to serve our customers. The association also paid $58.1 million in cash patronage to our customer-owners across the Northwest.

PATRONAG E PAID ($ in millions)

Those of us in agriculture have experienced a strong run the past several years during a time when many areas of the economy have struggled. But, we all know good times never last forever. The board and management team are carefully monitoring trends and economic indicators to ensure we are well positioned and continue to build organizational capacity to support Northwest agriculture for generations to come. Kevin Riel Yakima, Washington Julie Shiflett Spokane, Washington Mark Gehring Salem, Oregon Jim Farmer Nyssa, Oregon Rick Barnes Callahan, California Herb Karst Sunburst, Montana Christy Burmeister-Smith Newman Lake, Washington Bruce Nelson Spokane, Washington Karen Schott Chair - Broadview, Montana Dave Hedlin Vice Chair - Mt. Vernon, Washington

53.3

55.2

58.1

36.0 26.0

2009 2010

2011

2012

2013

We would like to extend our gratitude to Bruce Nelson and Drew Eggers as they retire from the board of directors after 15 and 13 years respectively. Their leadership, experience and considerable expertise in many areas has been invaluable in overseeing Northwest FCSâ&#x20AC;&#x2122; strategy and performance. We wish Bruce, Drew and their families the very best and we look forward to welcoming two new directors in March.

On behalf of the Northwest FCS Board, we appreciate the confidence our customer-owners have placed in this association. We also want to recognize our 180 Local Advisory Committee members, 640 employees and our senior leadership team for a job well done.

To complement the business side of our mission, Northwest FCS continues to put the companyâ&#x20AC;&#x2122;s talent and resources back into our rural communities. We believe strong communities foster strong businesses.

Karen Schott Board Chair

Bar Four Ranch Broadview, Montana

The Schott family raises winter wheat, spring wheat, peas and also manages a lease pasture operation.

2013 Board of Directors

On Behalf of the Board

Pictured left to right:

Dave Nisbet Bay Center, Washington Drew Eggers Meridian, Idaho John Helle Dillon, Montana Shawn Walters New Dale, Idaho

Investments in youth education, industry associations, sponsorships and our Rural Community Grant Program are making a profound difference in the communities where we live and work.

PATRONAG E PAID ($ in millions)

53.3

55.2

58.1

36.0 26.0

2009 2010

2011

2012

2013

Karen Schott Board Chair

Bar Four Ranch Broadview, Montana

The Schott family raises winter wheat, spring wheat, peas and also manages a lease pasture operation.

Insights from the CEO advisors. By “trusted advisors” we mean knowledgeable staff who take time to understand our customers’ businesses and get to know their families and other key players in their operation and industry. Customers tell us their trusted advisors are a valued resource to help them grow and transition their businesses to the next generation.

As a cooperative, our goal is to provide value to you as a customer and an owner. As our customer, we strive to provide products at prices that are competitive, earning your trust through our knowledge of your business, the dedication and quality of our staff, and even-handedness through the inevitable cycles in agriculture. As an owner, we aim to provide you a meaningful return of value in the form of patronage dividends. In 2013 we returned $58.1 million in patronage to our customer-owners.

Phil DiPofi President and CEO

Northwest Farm Credit Services Spokane, Washington

Northwest FCS is the leading financial cooperative in the Northwest with 45 branches and 640 employees in Idaho, Montana, Oregon, Washington and Alaska.

Your cooperative earned a record $236.9 million in 2013, up 26.5 percent from $187.3 million in 2012. A combination of factors contributed to our financial results, with credit quality improvement being the single largest factor. Producers continued to experience strong prices for most commodities, resulting in strong levels of net income. This year we saw many customers pay down or pay off debt, which limited our growth to a degree. We’ve been pleased to see our customers’ financial capacity continue to strengthen in these high income years for agriculture.

Securing affordable financing is one of the biggest challenges faced by the next generation in agriculture, forestry and fisheries. Helping these young and beginning producers start and grow their own businesses is an integral part of our cooperative mission. During 2013, the number of customers financed by our AgVision program increased significantly. We’ve added additional staff to work with and mentor these producers to make sound management decisions, thereby strengthening the foundation for the future of our industry.

“Customers tell us their trusted advisors are a valued resource to help them grow and

transition their business to the next generation.”

Our Business Management Center programs help the next generation to improve and refine their financial and management skills. In 2013 we launched our new RateWise program that rewards young and beginning producers for continuing their management education with interest rate reductions on new loans. We call it, “Learn and earn.”

Building Capacity Strategy is about making choices, building competitive advantage and planning for the future. Strategy is not set through one initiative or one big deal. Rather, we build it by making sound decisions and enhancing capacity. We continued to build our organizational capacity during 2013 by concentrating on four key areas in our business plan – our customers, our people, operations, and our financial strength. In each of these vital areas, we made significant gains to build a business that will sustain itself during the inevitable cycles we’ll face in the future.

Human Resource Capacity The strength of our business has always been defined by the quality of our people and our performance-driven culture. We know the quality of our people differentiates this organization and will serve as the cornerstone of our success. For us to be successful, our employees must reflect the diversity of the communities and cultures in which we operate. That means we must attract, retain and motivate people from many backgrounds and perspectives. Over the past three years we have increased our staffing levels, and on average, we’ve hired 27 trainees per

Customer Capacity This year we placed a greater emphasis on developing our staff as trusted

in the form of patronage to our customer-owners. Plus, the organization must have the financial capacity to withstand increasing volatility.

year to ensure we continually bring new talent into the organization, build bench strength for the future and address ongoing succession needs. Investments in these trainees are substantial and include individual mentoring from our more experienced employees.

Improving the association’s credit quality has been a major focus area the past several years following the economic downturn in 2008-2009 when several industries faced historically hard times. We’ve worked closely with many of these customers as they’ve executed recovery plans to reposition their operations. We believe this even-handed and measured approach has reinforced our value proposition and deepened our long-term customer relationships. In 2013 we significantly improved credit quality. Financial resources previously used to fund NET INCOME allowances for credit losses can now be used for more AF TER TA XES 236.9 productive investments. Our capital grew to $1.8 billion, ($ in millions) up 12.2 percent from $1.6 billion in 2012. A strong capital 187.3 base provides for future loan growth and helps us 159.2 150.1 withstand unforeseen future downturns.

During 2013 we partnered with the Gallup research company to help us better understand and improve our level of employee engagement. Gallup defines engagement as an employees' involvement with, commitment to and satisfaction with work. Our initial results were very strong and we will continue to build on our strengths going forward. I’m continually inspired by stories from employees who are reaching out to support worthy causes in their communities. They donate their time, talents and financial resources to care for our military veterans, secure food for local food banks or race to find a cure for cancer, just to name a few. To support their generosity we’re now providing three days of paid time off each year to continue this heart-felt work.

C AP ITAL ($ in billions)

1.8 1.6

1.2

1.3

1.4

106.1

Looking Forward

Looking forward, our greatest challenge and opportunity will be increasing our human resource capacity. We know strong teams with great people outperform 2009 2010 2011 2012 2013 individuals. As our customers successfully transition their businesses to the next generation, we are also developing our employees with an eye to the future. Promising young people are being mentored by our wise, experienced leaders. New technologies are being implemented to help our employees build fresh, new skills to better serve our customers. We will continue to build a purpose-driven culture – the foundation for any successful business – that inspires our people to grow and reach their full potential as we position to serve agriculture for generations to come.

Operations Capacity 2013 was a very productive year for operations and 2009 2010 2011 2012 2013 technology improvements. To top the list of accomplishments, we successfully converted our loan accounting system from one that was outdated to a new, more powerful system that is used by several Farm Credit associations. We save significant dollars by partnering with others. With the loan accounting conversion behind us, we’re now turning our attention to enhance customer and staff-related technologies in 2014. We must make it easier for customers to do business with us electronically. Over the next two years we will develop customized web access to allow each customer to individualize their Northwest FCS access and banking information. We will also enhance the suite of online banking tools we offer.

Financial Capacity Increasing our financial capacity means we build an organization that can handle future customer needs, make investments back into the business and pay an appropriate return

Phil DiPofi President and CEO

Northwest Farm Credit Services Spokane, Washington

Northwest FCS is the leading financial cooperative in the Northwest with 45 branches and 640 employees in Idaho, Montana, Oregon, Washington and Alaska.

“Customers tell us their trusted advisors are a valued resource to help them grow and

transition their business to the next generation.”

Customer Capacity This year we placed a greater emphasis on developing our staff as trusted

in the form of patronage to our customer-owners. Plus, the organization must have the financial capacity to withstand increasing volatility.

C AP ITAL ($ in billions)

1.8 1.6

1.2

1.3

1.4

106.1

Looking Forward

Financial Capacity Increasing our financial capacity means we build an organization that can handle future customer needs, make investments back into the business and pay an appropriate return

Generational Transitions â&#x20AC;&#x201C; Building for the Future Experts predict a growing world population that will require 70 percent more food production by 2050 â&#x20AC;&#x201C; just 36 years away. Today, about 60 percent of farmers in this country are 55 years or older. For every one farmer and rancher under the age of 25, five others are 75 or older. Getting young people involved in agriculture is critical to meeting the growing demand for food. Fortunately, agriculture has been a bright spot in an otherwise weak economy and more young people are showing an interest. Yet, itâ&#x20AC;&#x2122;s never easy to transition to the next generation, particularly for family-owned, capital intensive businesses. Young people with passion need to be prepared to manage and lead. Economically, the business model has to perpetuate long-term growth.

If Northwest FCS customers are an indication of the future, agriculture is in good hands.

Creating an On-Ramp into the Business our foreman. These guys are natural leaders with respect from their peers. Now they look for solutions together before they call me. Our goal is to develop a team with the field expertise to support Adam and Hannah going forward.

My wife Sharon and I are first generation fruit growers. We moved to Washington 35 years ago from the East Coast where I studied horticulture. People said if you want to get into the orchard business you either marry it or inherit it. But, we’re both a little headstrong. We found another way in by starting with nothing and adding a little bit here and there. We could make mistakes without a lot to lose back then. It’s much different today with the size and scope of our business.

Chuck Podlich Owner

Cider Works Farms Orondo, Washington

Manages a 300-acre orchard with cider production facility, country market and fruit stand.

Sharon and I always thought we’d sell the business when we were tired of it. We didn’t think any of our four daughters would want to come back. But, in 2009 we started working on a succession plan when Hannah, 27, and her husband Adam, 29, wanted to leave their Portland-based careers for an on-ramp into the business. It didn’t take long to feel honored that we created a business someone wants to continue.

Today Adam is leading our weekly manager meetings, keeping track of assignments and holding people accountable. Hannah handles payroll, food safety and accounting. I can still use my horticulture experience to help during the spring but they really won’t need me at harvest. Ultimately my goal is to become nonessential and contribute more than I cost.

“Succession won’t happen

unless I make it happen. The

What would I tell others about succession planning? Prepare, take your time and think it through. I envisioned the transition as being a tranquil period where everything would stay the same. But no, things get more complex. The company we’re transitioning today isn’t the same company we started transitioning two years ago. The – Adam Poush business doesn’t stand still. We don’t always have clearly defined roles and boundaries for people to operate within. But, I think we’re dynamic and adapting as we go.

next generation can just be workers or we can begin to

think like business owners.”

Adam grew up in Portland. He didn’t know anything about trees when he came here in 2012. I’m a horticulturist, so I don’t think it’s fair to expect Adam to be my direct replacement. But he’s a good business man. The first year Adam learned everything he could about our cider press and retail business. He’s managing those employees on a year-round basis now. Sometimes I think it’s a little tough for Sharon to let go of the retail business she built and I feel the same way on the orchard side.

Hannah and Adam have youth, energy and passion on their side. Adam learns better by doing versus being told what to do. He reminds me a lot of myself years ago. He’s confident and willing to try new things. That’s how Sharon and I started out. Now we’re working together to build a company that will thrive without us.

In the field we’ve added a mid-level management team to work with

Top middle: Chuck and Northwest FCS Relationship Manager Alan Kirpes Left: Sharon, Chuck and Alan Kirpes Far right: Hannah and Adam Poush Middle: Chuck and Sharon Bottom middle: Adam, Hannah, Sharon and Chuck

“I frequently bounce ideas off our Northwest FCS relationship manager when it comes to expansion. As a trusted advisor Alan offers a valuable perspective that keeps me grounded in reality, yet honors my dreams.” – Chuck Podlich

Chuck Podlich Owner

Cider Works Farms Orondo, Washington

Manages a 300-acre orchard with cider production facility, country market and fruit stand.

“Succession won’t happen

unless I make it happen. The

next generation can just be workers or we can begin to

think like business owners.”

In the field we’ve added a mid-level management team to work with

Cousins Transition to Take Over This year, the cousins will manage their own farm together called Koompin Ag. We’re leasing them ground – large enough to make it worth their while – and renting them machinery. They can buy fertilizer at our cost, but they’ll track usage and pay expenses in real dollars. Costs need to be near market value for them to learn. It either pencils or it doesn’t. This is a training ground and they’re calling the shots together.

People say my brother and I are opposites – Klaren is the visionary and I keep our eyes on the ball. Dad passed away when we were young so everything we learned about farming after college was through trial and error. Our old high school coach encouraged us to grow and eventually became a silent partner. We weren’t necessarily expanding the operation for the next generation. We expanded to reach critical mass and economies of scale to be viable. Now the farm is in a position for our four kids to manage together.

Kenny Koompin Partner

Koompin Farms American Falls, Idaho

Raises 8,200 acres of row crops including potatoes, wheat, barley and corn.

Working with multiple cousins will be different than farming with a brother. Right now the kids have their own areas of responsibility, but we’re bringing them together to make decisions. We have a wide range of ages and experiences, too. Klaren’s oldest son Kamren, 33, has been here nine years since he graduated from college. His son Kael, 32, has worked eight years for us. My son Pete, 26, came back after he graduated in 2010 and my daughter Amanda, 27, joined us after college a year later. Given the ages, Kamren will be retiring when Pete has 10 years left in the business.

“You want to let the next generation experience their own successes and failures as long as the failures don’t cost too much money.” – Klaren Koompin

Sometimes raising crops is the easy part. Family business issues can be much more complicated and stressful. There will be differences of opinion. We’ve always said this is a democracy so everyone needs to speak up and voice their opinions. We try to come to consensus. If the vote doesn’t go your way though, you still support the decision. It was easier for Klaren and I to make decisions than it will be for the four of them. But, we’re a family who loves each other and business decisions need to be made. They will figure it out. And we’ve got to let them do it.

The next generation will have more opportunities than we did. They have impressive computer skills and learn new technology quickly. We wouldn’t be able to manage an operation of this size without them. They’re smart kids and they see the big picture. If we continue to keep the farm viable and intact, there’s no reason they can’t make it bigger and better together.

Today the kids are helping us track costs to the acre. They’ve all attended Northwest FCS financial workshops and we meet together with our relationship manager to review the budget. They understand the gross figures, but now we’re digging into the details. At some point we’ll need to turn responsibility over and let them make all the decisions. We’re not there yet, but we’re getting closer all the time.

Top left: Klaren and Kenny Top right: Klaren, Kenny and Northwest FCS Relationship Manager Adam Teichert Middle: Kael, Kamren and Klaren Bottom left: Kenny, Adam and Klaren Middle right: Pete, Kenny and Amanda

“To be a viable business long term, you need a competitive lender who shares your vision.” – Klaren Koompin

Kenny Koompin Partner

Koompin Farms American Falls, Idaho

Raises 8,200 acres of row crops including potatoes, wheat, barley and corn.

“You want to let the next generation experience their own successes and failures as long as the failures don’t cost too much money.” – Klaren Koompin

“To be a viable business long term, you need a competitive lender who shares your vision.” – Klaren Koompin

Carrying the Legacy Forward sister Sue Loband played an absolutely vital role as his personal representative, getting the business and related assets transitioned to Curt’s children while giving them space to grow into their roles. Outside professionals Curt worked with and trusted helped us navigate complicated tax and legal issues.

Curt Maberry started working on a transition plan in 2005. He was 58 with two kids on the farm, Matt, 25 and Angie, 28. Oldest daughter Mandi, 30, was close to home pursuing her art career. Curt was expanding the crop side of the business and increasing production in the processing plant. His vision was to create a sustainable operation. None of us ever imagined he would pass away so suddenly just two years later.

Tom VanBerkum Business Manager

Tom joined Curt Maberry Farm in 2005 after working for their public accounting firm.

Curt Maberry Farm Lynden, Washington

Grows and processes nearly 1,000 acres of strawberries, red raspberries and blueberries.

Today Curt’s legacy lives on, reflected in the business he built, the relationships he made and the family he treasured. Curt loved sports, which influenced his management style. He always had an organized plan. He coached his employees, particularly his kids, to plan ahead and execute. Instead of telling people what to do he always asked them what the priorities were. He wanted everyone to think for themselves before he gave direction. His coaching management style made the transition easier when everyone stepped up quickly to contribute to the team.

Initially, Matt, Angie and Mandi found themselves in roles that weren’t clearly defined or always comfortable. We started working with a facilitator from Northwest FCS six months after Curt passed away and the planning process was a significant help to us. The family came together to create a unified vision for the business. We talked about strengths, weaknesses, their roles and where the family wanted to take the business going forward. The siblings are very loyal to each other, but there are honest differences of opinion too. We needed an outside facilitator to help them learn to communicate as partners, – Matt Maberry to ask tough questions and hold us all accountable to answer them.

“A strategic plan is only

as good as the paper it’s

written on unless someone puts it into action.”

I’m grateful for how much this family wanted to communicate and work together. Matt has really grown into his leadership role as general manager. He has a plan and is encouraging others while holding them accountable. Angie is a tremendous asset on the HR side, sharing her passion for people and relationships. Together they’ve earned the loyalty and respect of everyone who works here. Mandi isn’t involved in the day-to-day operations, but she has an important voice at the ownership table. These were the well-laid plans Curt Maberry made. He would be so pleased to see how his kids have grown as they care for the legacy he built.

Growing up, Matt, Angie and Mandi shared rich experiences working on and around the farm. Curt was intentional about putting them in different positions to learn the business. Matt and Angie were involved in the numbers early on, putting budgets together for the departments they worked in. Curt insisted on having regular business meetings to help them understand the financial cycles our industry goes through. One of the most important things Curt did in estate planning was selecting the right people to put in places of responsibility. Curt’s

“Northwest FCS provides resources beyond just funding loans. The business planning services are truly valued

Top left: Northwest FCS Credit Officer Corrine Reynolds and Tom Top right: Matt, Angie and Mandi Middle: Matt, Angie, Mandi and Tom Bottom left: Angie and Mandi Bottom right: Angie and Matt

and appreciated.” – Angie Maberry

Tom VanBerkum Business Manager

Tom joined Curt Maberry Farm in 2005 after working for their public accounting firm.

Curt Maberry Farm Lynden, Washington

Grows and processes nearly 1,000 acres of strawberries, red raspberries and blueberries.

“A strategic plan is only

as good as the paper it’s

written on unless someone puts it into action.”

“Northwest FCS provides resources beyond just funding loans. The business planning services are truly valued

Top left: Northwest FCS Credit Officer Corrine Reynolds and Tom Top right: Matt, Angie and Mandi Middle: Matt, Angie, Mandi and Tom Bottom left: Angie and Mandi Bottom right: Angie and Matt

and appreciated.” – Angie Maberry

Our Brand Promise Northwest Farm Credit Services is your trusted source for financial solutions. No other lender understands the agriculture, food and fiber industries better and is more committed to their future and that of rural America.

2013 NORTHWEST FARM CREDIT SERVICES, ACA Annual Report to Stockholders

NORTHWEST FARM CREDIT SERVICES, ACA

The undersigned certify that they have reviewed the 2013 Annual Report to Stockholders and it

REPORT OF MANAGEMENT

has been prepared in accordance with all applicable statutory or regulatory requirements and the information contained herein is true, accurate, and complete to the best of our knowledge and belief.

The financial statements of Northwest Farm Credit Services, ACA and its wholly owned subsidiaries (Northwest FCS) are prepared by management, who is responsible for their integrity and objectivity, including amounts 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, and, in the opinion of management, fairly present the financial condition

Phil DiPofi

Tom Nakano

Karen Schott

of Northwest FCS. Other financial information included in the 2013 Annual Report to Stockholders

President and CEO

EVP-Chief Administrative and

Chair of the Board

is consistent with that in the financial statements.

February 28, 2014

Financial Officer

February 28, 2014

February 28, 2014 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 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.

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

Management of Northwest FCS is responsible for establishing and maintaining adequate internal

Phil DiPofi

Tom Nakano

Karen Schott

control over financial reporting for Northwest FCS’ consolidated financial statements. For purposes

President and CEO

EVP-Chief Administrative and

Chair of the Board

of this report “internal control over financial reporting” is defined as a process designed by or

February 28, 2014

Financial Officer

February 28, 2014

financial reporting. See Report of Independent Auditors.

under the supervision of Northwest FCS’ principal executives and principal financial officers, or

February 28, 2014

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, 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, 2013. 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, 2013, the internal control over financial reporting was effective. Additionally, based on this assessment, Northwest FCS determined there were no material weaknesses in the internal control over financial reporting as of December 31, 2013. There were no material changes in the internal control over financial reporting during the year ended December 31, 2013.

NORTHWEST FARM CREDIT SERVICES, ACA

Based on the foregoing review and discussions, and relying thereon, the Audit Committee

REPORT OF AUDIT COMMITTEE

recommended the Northwest FCS Board of Directors include the audited financial statements in the annual report as of and for the year ended December 31, 2013.

The Audit Committee is composed of seven members of the Northwest FCS Board of Directors. In 2013, the Audit Committee met five times in person and participated in four 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 Christy Burmeister-Smith

and the adequacy of management’s action with respect to recommendations arising from those

Chair of the Audit Committee

auditing activities. In addition, the Audit Committee approved the appointment of

February 28, 2014

PricewaterhouseCoopers LLP (PwC) as our independent auditors for 2013. The Audit Committee’s responsibilities are described more fully in the Internal Controls Policy and the Audit Committee

Drew Eggers

Operating Statement.

Jim Farmer Mark Gehring

Management is responsible for internal controls and the preparation of the financial statements in

Dave Hedlin

accordance with accounting principles generally accepted in the United States of America. PwC is

John Helle

responsible for performing an independent audit of the financial statements in accordance with

Shawn Walters

generally accepted auditing standards in the United States of America and for issuing its 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, 2013, 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), 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 2013, PwC was engaged for a training related non-audit service. The Audit Committee has discussed with management and PwC such other matters and received such assurances from them as the Audit Committee deemed appropriate.

NORTHWEST FARM CREDIT SERVICES, ACA

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

NORTHWEST FARM CREDIT SERVICES, ACA

performance of the loan portfolio, growth and seasonal factors; tax reform; the effect of banking

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

and financial services reforms; possible amendments to, and interpretations of, risk-based capital guidelines and reporting instructions; the ability of states to adopt more extensive consumer privacy protections through legislation or regulation; the resolution of legal proceedings and related matters; and nonperformance by counterparties to derivative positions.

Business Overview

The following discussion summarizes the financial position and results of operations of Northwest Farm Credit Services, an Agricultural Credit Association, and its wholly-owned subsidiaries

Farm Credit System Structure and Mission

(collectively referred to as Northwest FCS) for the year ended December 31, 2013. The

As of January 1, 2014 we are one of 78 associations in the Farm Credit System (System), which

commentary should be read in conjunction with the accompanying Consolidated Financial

was created by Congress in 1916 and has served agricultural producers for more than 95 years.

Statements and Notes. The Consolidated Financial Statements were prepared under the oversight

The System’s mission is to provide sound and dependable credit to American farmers, ranchers,

of the Audit Committee.

and producers or harvesters of aquatic products and farm-related businesses through a memberowned cooperative system. This is done by making loans and providing financial services. Through

Our quarterly and annual reports to shareholders may be obtained free of charge on our website,

its commitment and dedication to agriculture, the System continues to have the largest portfolio of

www.northwestfcs.com or upon request at Northwest Farm Credit Services, ACA, P.O. Box 2515,

agricultural loans of any lender in the United States. The Farm Credit Administration (FCA) is the

Spokane, Washington 99220-2515 or by telephone at (509) 340-5300 or toll free (800) 743-2125.

System’s independent safety and soundness federal regulator and was established to supervise, examine and regulate System institutions.

Dollar amounts are in thousands unless otherwise stated. Our Structure and Focus

Forward-Looking Statements

As a cooperative, we are owned by the members we serve. The territory we serve extends across

Certain statements contained in this report that are not historical facts are forward-looking

a diverse agricultural region consisting primarily of Washington, Idaho, Oregon, Montana and

statements within the meaning of the Private Securities Litigation Reform Act. Our actual results

Alaska. We make long-term real estate mortgage loans to farmers, ranchers, rural residents, and

may differ materially from those included in the forward-looking statements that relate to plans,

agribusinesses and production and intermediate-term loans for agricultural production or operating

projections, expectations, and intentions. Forward-looking statements are typically identified by

purposes. Additionally, we provide related services to our customers, such as credit life insurance,

words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “plan,” “project,” “may,”

multi-peril crop and crop hail insurance and business management services. Our success begins

“will,” “should,” “would,” “could” or similar expressions. Although we believe the information

with our extensive agricultural experience and knowledge of the market and is dependent on the

expressed or implied in such forward-looking statements is reasonable, no assurance can be given

level of satisfaction we provide our customers.

that such projections and expectations will be realized or the extent to which a particular plan, projection, or expectation may be realized. These forward-looking statements are based on current

As part of the System, we obtain the funding for our lending and operations from CoBank, ACB

knowledge and are subject to various risks and uncertainties, including, but not limited to:

(CoBank), which is one of the four Farm Credit System Banks. CoBank is a cooperative of which we

fluctuations in the agricultural, energy, international and leasing industry sectors; weather,

are a member. CoBank, its related associations, and AgVantis Inc. (AgVantis) a technology service

disease, and other adverse climatic or biological conditions that impact agricultural productivity and

corporation, are referred to as the District. Effective January 1, 2012, U.S. AgBank, FCB merged

income; United States and global economic conditions; sovereign or regulatory actions; the level of

with CoBank, FCB, a wholly owned subsidiary of CoBank. The merger did not impact the financial

interest rates; changes in assumptions underlying the valuations of financial instruments; changes

position or presentation of financial information for Northwest FCS.

in estimates underlying the allowance for credit losses; economic conditions and credit

We, along with the customers’ investment in our association are materially affected by CoBank’s

Forest Products: Volatility in pricing and demand continues in the forest products industry.

financial condition and results of operations. The CoBank quarterly and annual reports are

Competition between domestic mills and export buyers is driving log prices higher. In areas of the

available free of charge by accessing CoBank’s website, www.cobank.com, or may be obtained at

Northwest, log prices exceed levels associated with the height of the housing boom. In the lumber

no charge by contacting us. Annual reports are available within 75 days after year end and

and panel markets, mills have experienced periods of strong price increases followed by steep

quarterly reports are available within 40 days after the calendar quarter end.

downward corrections. This volatility complicates management decisions, particularly in an environment of rising log costs. U.S. fiber consumption is expected to grow in 2014, driven

2013 Financial Highlights

primarily by increases in housing starts. However, price volatility is expected to continue, fueled by

The year ended December 31, 2013 reflected strong financial performance. Record earnings and a

changes in supply chain inventory levels and mill capacity utilization.

strong capital position allowed us to declare a cash patronage distribution of $58.1 million representing a return of approximately 75 basis points for the majority of our eligible customers

Cattle and Livestock: The principal commodity we finance in this sector is beef cattle. Cattle

based on their average 2013 loan balances. Other highlights include:

markets continue to strengthen. Prices for feeder and fed cattle are at record levels. Falling feed prices are the most significant variable supporting feeder cattle prices. With improved profit



Net income for the year was $236,889, up 26.5 percent from 2012. The increase in net

margins, feedlots are bidding up prices in order to secure inventory. Tight supplies will continue to

income is driven mainly by significantly improved credit quality which resulted in credit loss

support cattle prices for the foreseeable future. Global and domestic beef demand is strong,

reversals of $34,677 as compared to a provision for credit losses recorded in 2012 of

further supporting prices. However, continued beef price increases may challenge consumer

$30,490.

demand.

Capital levels remained strong and well in excess of regulatory minimums. As of December Fruit and Tree Nuts: The principal commodity we finance in this sector is apples. The outlook for

31, 2013, our members’ equity totaled approximately $1.8 billion, and our members’ equity as

the Northwest apple industry is tempered from last season. For the 2013-2014 crop season, the

a percentage of total assets was 18.3 percent. 

second largest crop in Northwest history is matched with a rebound in the North American apple

Our loan portfolio volume increased modestly in 2013, with an ending gross loan and accrued

crop. Increased supplies are weighing on markets. Northwest apples are experiencing high cullage

interest balance of $9.2 billion. During the same period our nonaccrual loan volume

due to internal condition issues. Affected fruit is not acceptable in the fresh market, which is

significantly declined by $83,690, a decrease of 49.2 percent.

impacting returns for both growers and packers. Apple prices, while generally profitable, have been pressured lower. Prices are expected to firm in the first quarter of 2014 and stay strong

Commodity Review and Outlook

through the marketing season.

The following highlights the general health of agricultural commodities with the greatest concentrations in our loan portfolio.

Grains: The principal commodity we finance in this sector is wheat. Northwest wheat producers face a changing marketplace entering 2014. Wheat market fundamentals are bearish, pressured by

Dairy: After enduring negative profit margins for much of the year, dairy producers closed 2013

rising global stocks and weak cross-market support from corn. Although U.S. wheat production

with strong profit margins fueled by rising milk prices, falling corn prices, and historically high U.S.

was down in the 2013-2014 crop season, worldwide wheat stocks rose. Stronger near-term prices

dairy exports. Milk prices are expected to remain strong in 2014, but could be pressured by

are unlikely without a supply disruption. Lower corn prices are generally pressuring grain prices,

increased competition in global export markets. Milk production in New Zealand and the European

and ample corn supplies are reducing the amount of wheat used as feed. Profitability for wheat

Union is expected to increase. Although lower feed costs are expected to support dairy producers’

producers will be challenged in 2014 given falling prices. However, strong profits in recent years

profit margins, prices for soybean meal, alfalfa, and other feed ingredients remain high relative to

have bolstered wheat producers’ ability to bear downside risk.

declines in corn prices.

Loan concentrations by state are presented in the following table:

Potatoes: Northwest fresh potato prices have improved considerably from the prior year. Lower potato production in the United States and the Northwest is supporting the market. Fall frosts negatively impacted the storability of potatoes in some areas. Where storage issues are not a concern, producers are delaying open market potato sales, anticipating stronger prices later in the season. Overall, potato growers are expected to be profitable for their 2013 crop. For more information on our industries served visit the Northwest FCS Knowledge Center at www.northwestfcs.com.

Loan Portfolio

Gross loans, impaired loans and related accrued interest, where appropriate, are presented in the

Total loans and accrued interest outstanding were $9.2 billion at December 31, 2013, an increase

following table:

of $162,398, or 1.8 percent from the December 31, 2012 balance of $9.1 billion. During 2012, total loans and accrued interest increased $525,859 million or 6.2 percent, from $8.5 billion at December 31, 2011. In 2013, the modest growth in the portfolio is a result of strong customer liquidity and less dependence on operating funding. In 2012, our growth came primarily from existing customer expansion in land and capital improvements. Loans and accrued interest by type are presented in the following table:

Total impaired loans and interest decreased $93,010, or 41.6 percent, during the year ended December 31, 2013 as compared to December 31, 2012. The majority of this decrease was related to nonaccrual loans, which decreased $83,690 or 49.2 percent, as compared with December 31, 2012. The following table reflects activity within the nonaccrual loan portfolio:

As of December 31, 2013, nonaccrual loans that were current as to principal and interest installments totaled $77,785 representing 89.9 percent of the nonaccrual loan portfolio compared to $125,206 representing 73.5 percent of the nonaccrual loan portfolio at December 31, 2012, and

$178,550 representing 73.4 percent of the nonaccrual loan portfolio at December 31, 2011.

Coverage of the ALL, as a percentage of certain key loan categories, is presented in the following

Additional loan information is in Note 3 to the Consolidated Financial Statements.

table:

Allowance for Credit Losses The allowance for credit losses is comprised of the allowance for loan losses (ALL) and the reserve for 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

Results of Operations

lending commitments, which generally considers types of loans, credit quality, specific industry

Our net income for the year ended December 31, 2013, was $236,889, compared to $187,255 for

conditions, general economic and political conditions, and changes in the character, composition,

2012 and $159,156 for 2011. The following table provides detail of changes in the components of

and performance of the portfolio, among other factors. The allowance for credit losses is calculated

our net income:

based on a historical loss model that takes into consideration various risk characteristics of our loan portfolio. We evaluate the reasonableness of this model and determine whether adjustments to the allowance are appropriate to reflect the risks inherent in the portfolio. Individual loans are evaluated based on the borrowerâ&#x20AC;&#x2122;s overall financial condition, resources, and payment history; 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,

Net Interest Income: Net interest income was $3,816 lower in 2013 compared to 2012

regulatory oversight, geographic location, industry and other factors.

primarily due to a decrease in loan spread caused in part by greater prepayment expense, We maintain a reserve on unfunded commitments. The reserve reflects our best estimate of losses

competitive pressures and an increase in the average loan volume in lower spread lines of

inherent in lending commitments made to customers but not yet disbursed. Factors such as the

business. Net interest income was $6,472 higher in 2012 compared to 2011 primarily due to an

likelihood of disbursements and the likelihood of losses given disbursement are utilized in

increase in average loan volume, increased income from nonaccrual loans and a decrease in the

determining this reserve. This reserve is reported within Other liabilities on the Consolidated

cost of funds. The cost of funds was impacted by the composition of the balance sheet and the

Balance Sheet and totaled $15,000 at December 31, 2013 and $12,000 at December 31, 2012 and

amount of equity available to fund loan volume. These items were partially offset by a decrease in

2011.

loan spread caused in part by greater prepayment expense, competitive pressures, and lower interest rates.

The ALL reserves at December 31, 2013, 2012, and 2011 totaled $97,000, $128,000, and $126,500, respectively. Specific loan loss reserves at December 31, 2013, 2012, and 2011 totaled $16,405, $47,971, and $31,679, respectively. For each of these respective years, the specific reserve was primarily comprised of those relationships within the agricultural sectors which were impacted by volatility in commodity and input prices, such as dairy, as well as those industries, such as nursery, that were impacted by the overall downturn in the U.S. economy.

Influences on net interest income from changes in effective rates on, and volume of, interest-

(Insurance Fund). As described in Note 1 to the Consolidated Financial Statements when the

earning assets and interest-bearing liabilities between the years ended December 31, 2013, and

Insurance Fund exceeds the statutory 2 percent secure base amount, the Insurance Corporation

2012, and between the years ended December 31, 2012 and 2011, are presented in the following

evaluates the insurance premium assessment rate for Farm Credit System banks and may refund

table:

excess amounts. The Insurance Fund ended 2011 above the secure base amount, and consequently in the second quarter of 2012, the Insurance Corporation distributed to Farm Credit entities the excess amount. No similar refunds were received in 2013 or 2011. These refunds are recorded in Other income on the Consolidated Statement of Income. Financially related services decreased $2,155, or 13.8 percent as compared to 2012 related mainly to $2,147 received in 2012 from profit sharing with insurance companies. Similar profit sharing with insurance companies was not recognized in 2013 or 2011. Operating expense: In 2013, operating expenses increased by $5,121 when compared to 2012. Factors causing higher operating expenses when compared to the previous year were increased

Information regarding the average daily balances and average rates earned and paid on our

Insurance Fund premiums of $3,190, related to the assessment rate increasing, purchased services

portfolio are presented in the following table:

of $2,626, and salaries and benefits of $2,612. Purchased services increased primarily due to technology services we purchase from Financial Partners, Inc. as well as costs associated with contract labor for a new loan accounting system. Salaries and benefits were higher than in the previous year due to normal annual salary increases and incentive expenses related to 2013 performance. These increases were partially offset by a decrease in occupancy and equipment expense associated with certain assets that were fully depreciated in the prior year. Additionally, the reversal of a portion of the contingent liability recorded previously related to revenue taxes resulted in a reduction of operating expenses in 2013 of $1,638. Operating expenses increased by $9,000 in 2012 compared to 2011. The change is related mainly to salaries and benefits which increased $10,620 as compared to the prior year. Salaries and benefits include normal annual salary increases, increased incentive and defined benefit plan

Reversal of/Provision for credit losses: In 2013, credit quality improved significantly as

expenses. This increase was partially offset by a decrease in other operating expense of $2,008

shown by the reduction in nonaccrual loans. Additionally, net recoveries of $6,677 were recorded

when compared to 2011. This decrease is attributed to higher deferred loan origination costs and a

in 2013. Both of these resulted in a credit loss reversal in 2013. In the prior two years, our charge-

decline in credit enhancement premiums as compared to the prior year. Other operating expense

offs, nonaccrual loans, and adverse loans were higher than historical averages, and resulted in

also included an additional $1,000 related to a previously existing contingent liability related to

larger provisions for credit losses. Charge-offs net of recoveries totaled $28,990 and $26,841 in

revenue taxes. Decreases in operating expenses were in occupancy and equipment and insurance

2012 and 2011, respectively, and were concentrated in the dairy and nursery sectors.

fund premiums.

Noninterest income: The decrease in noninterest income of $10,225 in 2013 when compared to

Provision for income taxes: Income tax expense was $2,468 lower than in the previous year.

2012 was primarily due to a $11,238 refund received in 2012 from the Farm Credit System

The effective tax rate was 2.9 percent for the year ended December 31, 2013 as compared to 4.8

Insurance Corporation (Insurance Corporation) related to the Farm Credit Insurance Fund

percent for 2012. Contributing to the reduction was the reversal of the $1,000 uncertain tax

position recorded in the prior year as the uncertainty related to the state tax position has been

activity, capital re-investment, and liability management. While we actively manage interest rate

resolved. The remaining reduction in taxes is primarily related to a reduction in the income from

risk within the policy limits approved by the Board of Directors through the strategies established

non-patronage sourced business in our taxable entity as compared to the prior year. The tax

by the Asset/Liability Committee (ALCO), there is no assurance that these mismatches and

expense in 2012 increased $3,143 as compared to 2011. Contributing to the increase was a $1,000

exposures will not adversely impact our earnings and capital. Our overall objective is to develop

uncertain tax position recorded in the year ended December 31, 2012 referred to above. The

appropriately priced and structured loan products for our customers’ benefit and fund these

remaining increase in the provision for tax expense in 2012 as compared to 2011 was primarily

products with a blend of equity and debt obligations.

related to non-patronage sourced income from our taxable entity. The interest rate gap analysis shown in the following table presents a comparison of interestearning assets and interest-bearing liabilities in defined time segments at December 31, 2013. The

Liquidity and Funding Sources

interest rate gap analysis is a static indicator for how we are positioned by comparing the amount

The primary source of our liquidity and funding is a direct loan from CoBank which is reported as

of our assets and liabilities that reprice at various time periods in the future. The value of this

Note payable to CoBank, ACB on the Consolidated Balance Sheet. As described in Note 7 to the

analysis can be limited given other factors such as the differences between interest rate indices on

Consolidated Financial Statements, this direct loan is governed by a General Financing Agreement

loans and the underlying funding, the relative changes in the levels of interest rates over time, and

(GFA) and is collateralized by a pledge of substantially all of our assets and is also subject to

optionality included in loans and the respective funding that can impact future earnings and

regulatory borrowing limits. The GFA includes financial and credit metrics that if not maintained

market value.

can result in increases to our funding costs. The GFA also requires us to comply with FCA regulations regarding liquidity. To meet this requirement, we are allocated a share of CoBank’s liquid assets. We are currently in compliance with the GFA and do not foresee issues with obtaining funding or maintaining liquidity. We plan to continue to fund lending operations primarily through the utilization of our borrowing relationship with CoBank and retained earnings. CoBank’s primary source of funds is the ability to issue Systemwide Debt Securities to investors through the Federal Farm Credit Bank Funding Corporation. This access has traditionally provided a dependable source of competitively priced debt that is critical for supporting our mission of providing credit to agriculture and rural America. 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, 2013, no balance was outstanding on this line of credit.

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 reasonable stability in net interest income over an intermediate planning horizon and to preserve a relatively stable market value of equity over the long term. Mismatches and exposure in interest

Northwest FCS’ repricing gap as of December 31, 2013 is characterized as slightly asset sensitive.

rate repricing and indices of assets and liabilities can arise from product structures, customer

An asset sensitive position is favorable to the association in a rising rate environment and is less

favorable when interest rates are declining. Given some of the inherent weaknesses with interest

losses and enhance our capital ratios. These transactions amortize down so financial benefits

rate gap analysis, simulation models are used to develop additional interest rate sensitivity

diminish over time.

measures and estimates. The assumptions used to produce anticipated results are periodically reviewed and models are tested to help ensure reasonable performance. Various simulations are

For the year ended December 31, 2013, total members’ equity increased $190,701 or 12.2 percent

produced for net interest income and the market value of equity. These simulations help us assess

from December 31, 2012. The increase in members’ equity was primarily due to earnings of

interest rate risk and make adjustments as needed to our products and related funding strategies.

$236,889 and an increase in other comprehensive income of $12,172, partially offset by patronage payable of $58,134.

Our interest rate risk management board policy establishes limits for changes in net interest income and market value of equity sensitivities. These limits are measured and reviewed by the

As displayed in the following table, at December 31, 2013, 2012, and 2011, we exceeded the

ALCO monthly and reported to the Board of Directors at least quarterly. The Board policy limits for

minimum regulatory requirements, which are noted parenthetically:

net interest income and the market value of equity are a negative 15 percent change given parallel and instantaneous shocks of interest rates up and down 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 GFA 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 2014. See Note 8 to the Consolidated Financial Statements for further discussion of these regulatory ratios. The upward and downward shocks reflected in the above table are based on parallel and instantaneous interest rate movements of 1 and 2 percent. Due to extremely low short-term

NORTHWEST FARM CREDIT SERVICES, ACA

interest rates in 2013, the 1 and 2 percent parallel and instantaneous downward shock scenarios cannot be obtained. The downward interest rate shock in the preceding table was near zero. As of December 31, 2013, all interest rate risk-related measures were within Board policy limits, GFA requirements, and management guidelines.

Members’ Equity We have a capitalization objective to build and retain adequate members’ equity for our continued

Phil DiPofi

Tom Nakano

Karen Schott

President and CEO

EVP-Chief Administrative and

Chair of the Board

February 28, 2014

Financial Officer

February 28, 2014

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

require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement and whether effective internal control over financial reporting was maintained in all material respects. An audit of financial statements involves performing procedures to obtain audit evidence about the

REPORT OF INDEPENDENT AUDITORS

amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including assessment of the risks of material misstatement of the consolidated

To the Board of Directors and Stockholders

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

of Northwest Farm Credit Services

internal control relevant to the company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit of internal control over financial reporting involves obtaining an understanding of internal

We have audited the accompanying consolidated financial statements of Northwest Farm Credit Services, ACA and its subsidiaries (the Association), which comprise the consolidated balance

control over financial reporting, assessing the risk that a material weakness exists, and testing and

sheets as of December 31, 2013, 2012 and 2011, and the related consolidated statements of

evaluating the design and operating effectiveness of internal control based on the assessed risk.

income, of comprehensive income, of changes in members’ equity and of cash flows for the years

Our audits also included performing such other procedures as we considered necessary in the

then ended. We also have audited the Association’s internal control over financial reporting as of

circumstances. We believe that the audit evidence we obtained is sufficient and appropriate to

December 31, 2013 based on criteria established in Internal Control - Integrated Framework

provide a basis for our opinions.

(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Definition and Inherent Limitations of Internal Control Over Financial Reporting

Management's Responsibility

A company’s internal control over financial reporting is a process effected by those charged with

The Association's management is responsible for the preparation and fair presentation of the

governance, management, and other personnel, designed to provide reasonable assurance

consolidated financial statements in accordance with accounting principles generally accepted in

regarding the preparation of reliable financial statements in accordance with accounting principles

the United States of America, for maintaining internal control over financial reporting including the

generally accepted in the United States of America. A company’s internal control over financial

design, implementation, and maintenance of controls relevant to the preparation and fair

reporting includes those policies and procedures that (i) pertain to the maintenance of records

presentation of the consolidated financial statements that are free from material misstatement,

that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the

whether due to error or fraud, and for its assertion about the effectiveness of internal control over

assets of the company; (ii) provide reasonable assurance that transactions are recorded as

financial reporting, included in the Report on Internal Control over Financial Reporting appearing in

necessary to permit preparation of financial statements in accordance with generally accepted

this Annual Report.

accounting principles, and that receipts and expenditures of the company are being made only in

Auditor's Responsibility

(iii) provide reasonable assurance regarding prevention or timely detection and correction of

Our responsibility is to express an opinion on the consolidated financial statements and an opinion

unauthorized acquisition, use, or disposition of the company’s assets that could have a material

on the Association’s internal control over financial reporting based on our integrated audits. We

effect on the financial statements.

accordance with authorizations of management and those charged with governance; and

conducted our integrated audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) and in accordance with the auditing and attestation

Because of its inherent limitations, internal control over financial reporting may not prevent, or

standards established by the American Institute of Certified Public Accountants. Those standards

detect and correct misstatements. Also, projections of any evaluation of effectiveness to future

periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Association at December 31, 2013, 2012, and 2011, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Association maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework

(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

February 28, 2014 PricewaterhouseCoopers LLP, Three Embarcadero San Francisco, California 94111

NORTHWEST FARM CREDIT SERVICES, ACA

CONSOLIDATED BALANCE SHEET

NORTHWEST FARM CREDIT SERVICES, ACA

CONSOLIDATED STATEMENT OF INCOME

NORTHWEST FARM CREDIT SERVICES, ACA

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

NORTHWEST FARM CREDIT SERVICES, ACA

CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS’ EQUITY

NORTHWEST FARM CREDIT SERVICES, ACA

CONSOLIDATED STATEMENT OF CASH FLOWS

NORTHWEST FARM CREDIT SERVICES, ACA

Northwest FCS, along with other System institutions, owns Farm Credit Financial Partners, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(FPI), a dedicated service corporation that provides information technology solutions for various Farm Credit entities. At December 31, 2013, Northwest FCS owned approximately 15 percent of FPI.

(dollars in thousands, except as noted)

In 2011, Northwest FCS began participating in AgDirect, LLP (AgDirect), a trade credit financing

NOTE 1 > Organization and Operations

program which includes origination and re-financing of agricultural equipment loans through

Organization

which Northwest FCS is a partial owner. At December 31, 2013, Northwest FCS owned

independent equipment dealers. The program is facilitated by a limited liability partnership in approximately 12 percent of AgDirect.

Northwest Farm Credit Services, ACA and its subsidiaries, Northwest Farm Credit Services, FLCA (the Federal Land Credit Association (FLCA)) and Northwest Farm Credit Services, PCA (the

Effective September 1, 2012, Northwest FCS joined an alliance with nine other Farm Credit

Production Credit Association (PCA)), (collectively referred to as Northwest FCS) is a member-

partners to provide financing for agribusiness companies under the trade name, ProPartners

owned cooperative that provides credit and financially related services to or for the benefit of

Financial (ProPartners). ProPartners participates with crop input suppliers nationwide to create

eligible customers primarily in the states of Washington, Idaho, Oregon, Montana and Alaska.

financing programs for their customers. Upon joining ProPartners, Northwest FCS became a participant in 25.75 percent of future loan volume. ProPartners is directed by representatives from

Northwest FCS is a lending institution of the Farm Credit System (the System), a nationwide

the participating associations. The income, expense and loss sharing agreements are based on

system of cooperatively owned banks and associations, which was established by Acts of Congress

each association’s participation interest in ProPartners’ loan volume, which is established according

to meet the credit needs of American agriculture and rural America and is subject to the provisions

to a prescribed formula which includes the risk funds of the associations.

of the Farm Credit Act of 1971, as amended (the Farm Credit Act). At January 1, 2014, the System was comprised of three Farm Credit Banks, one Agricultural Credit Bank, and 78 associations.

The Farm Credit Administration (FCA) is delegated authority by Congress to regulate the System banks and associations. The FCA examines the activities of System institutions to ensure their

CoBank, ACB (CoBank or Bank), its related associations, and AgVantis Inc. (AgVantis) a technology

compliance with the Farm Credit Act, FCA regulations and safe and sound banking practices.

service corporation, are referred to as the District. The Bank provides the funding to associations within the District and is responsible for supervising certain activities of the District associations.

The Farm Credit Act established the Farm Credit System Insurance Corporation (Insurance

Effective January 1, 2012, U.S. AgBank, FCB merged with CoBank, FCB, a wholly owned subsidiary

Corporation) to administer the Farm Credit Insurance Fund (Insurance Fund). By law, the

of CoBank, ACB. The merger did not impact the financial position or presentation of financial

Insurance Fund is required to be used (1) to ensure the timely payment of principal and interest

information for Northwest FCS. As of December 31, 2013, the District consists of the Bank and 27

on Systemwide debt obligations (Insured Debt), (2) to ensure the retirement of protected stock at

Agricultural Credit Associations (ACA), which each have two wholly owned subsidiaries, (an FLCA

par or stated value, and (3) for other specified purposes. The Insurance Fund is also available for

and a PCA), two FLCAs and AgVantis.

discretionary use by the Insurance Corporation in providing assistance to certain troubled System institutions and to cover the operating expenses of the Insurance Corporation. Each System bank

ACA parent companies provide financing and related services through their FLCA and PCA

is required to pay premiums, which may be passed on as an expense to the associations, into the

subsidiaries. The FLCA makes secured long-term agricultural real estate and rural home mortgage

Insurance Fund based on its annual average outstanding insured debt adjusted to reflect the

loans. The PCA makes short- and intermediate-term loans for agricultural production or operating

reduced risk on loans or investments guaranteed by federal or state governments until the assets

purposes.

in the Insurance Fund reach the “secure base amount”, which is defined in the Farm Credit Act as 2 percent of the aggregate Insured Debt or such other percentage of the aggregate obligations as

the Insurance Corporation, in its sole discretion, determines to be actuarially sound. When the

estimates are discussed in the footnotes, as applicable. The consolidated financial statements

amount in the Insurance Fund exceeds the secure base amount, the Insurance Corporation is

include the accounts of Northwest Farm Credit Services, ACA, Northwest Farm Credit Services,

required to reduce premiums, as necessary to maintain the Insurance Fund at the 2 percent level.

FLCA, and Northwest Farm Credit Services, PCA. All inter-company transactions have been

As required by the Farm Credit Act, as amended, the Insurance Corporation may return excess

eliminated in consolidation.

funds above the secure base amount to System institutions. The Bank passes this premium expense and the return of excess funds as applicable, through to each association based on the

Recently Issued or Adopted Accounting Pronouncements

association’s average adjusted note payable balance with the Bank.

In December 2011, the Financial Accounting Standards Board (FASB) issued guidance entitled, “Balance Sheet – Disclosures about Offsetting Assets and Liabilities.” The guidance requires an

Operations

entity to disclose information about offsetting and related arrangements to enable users of its

The Farm Credit Act sets forth the types of authorized lending activity, persons eligible to borrow,

financial statements to understand the effects of those arrangements on its financial position. This

and financial services that Northwest FCS can offer. Northwest FCS is authorized to provide, either

includes the effect or potential effect of rights of setoff associated with an entity’s recognized

directly or in participation with other lenders, credit, credit commitments, and related services to

assets and recognized liabilities. The requirements apply to recognized financial instruments and

eligible customers. Eligible customers include farmers, ranchers, producers or harvesters of aquatic

derivative instruments that are offset in accordance with the rights of offset as stated in

products, rural residents, and farm-related businesses.

accounting guidance and for those recognized financial instruments and derivative instruments that

Northwest FCS also serves as an intermediary in offering credit life insurance and multi-peril crop

whether they are offset or not. This guidance is to be applied retrospectively, for all comparative

insurance and provides additional services to customers such as fee appraisals and business

periods and is effective for annual reporting periods beginning on or after January 1, 2013, and

management services.

interim periods, within those annual periods. The adoption of this guidance did not impact the

are subject to an enforceable master netting arrangement or similar agreement, irrespective of

financial condition or results of operations, and did not result in additional disclosures in the Northwest FCS’ financial condition may be impacted by factors that affect CoBank. The CoBank

current year.

Annual Report is available free of charge on CoBank’s website, www.cobank.com; or may be obtained at no charge by contacting Northwest FCS, P.O. Box 2515, Spokane, Washington 99220-

In February 2013, the FASB issued guidance entitled, “Reporting Amounts Reclassified out of

2515, or by telephone at (509) 340-5300, toll free (800) 743-2125, as well as upon request at any

Accumulated Other Comprehensive Income.” The guidance requires entities to present either

Northwest FCS office location. Upon request, stockholders of Northwest FCS will be provided with a

parenthetically on the face of the financial statements or in the notes to the financial statements,

copy of the CoBank Annual Report, which includes the combined balance sheet and income

significant amounts reclassified from each component of accumulated other comprehensive income

statements of CoBank and its related associations, and AgVantis. The CoBank Annual Report

and the income statement line items affected by the reclassification. The guidance is effective for

discusses the material aspects of the Bank’s and District’s financial condition, changes in financial

public entities for annual periods beginning after December 15, 2012 and for nonpublic entities for

condition, and results of operations.

annual periods beginning after December 15, 2013. The adoption of this guidance did not impact the financial condition or results of operations and resulted in additional disclosures.

NOTE 2 > Summary of Significant Accounting Policies The accounting and reporting policies of Northwest FCS conform to accounting principles generally accepted in the United States of America (GAAP) and prevailing practices within the banking industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from these estimates. Significant

Significant Accounting Policies

indicate that collection of principal and/or interest is in doubt. When a loan is placed in nonaccrual status, accrued interest deemed uncollectible is reversed (if accrued in the current year) and/or

Cash

charged against the allowance for loan losses (if accrued in the prior year). Loans are charged off

Cash, as included in the statement of cash flows, represents cash on hand and on deposit at

at the time they are determined to be uncollectible.

financial institutions.

A restructured loan constitutes a troubled debt restructuring if for economic or legal reasons

Investment Securities

related to the debtor’s financial difficulties, Northwest FCS grants a concession to the debtor that it

Northwest FCS may hold investments in accordance with mission-related investment and other

would not otherwise consider to be a market transaction. Such concessions may include monetary

investment programs approved by the Farm Credit Administration. These programs allow

concessions or other modifications to the contractual terms of the loan. If the borrower’s ability to

Northwest FCS to make investments that further the System’s mission to serve rural America.

meet the revised payment schedule is uncertain, the loan is classified as a nonaccrual loan.

Mission-related investments for which Northwest FCS has the intent and ability to hold to maturity are classified as held-to-maturity and carried at cost, adjusted for the amortization of premiums

When loans are in nonaccrual status, loan payments are generally applied against the recorded

and accretion of discounts.

nonaccrual balance. A nonaccrual loan may, at times, be maintained on a cash basis. As a cash basis nonaccrual loan, the recognition of interest income from cash payments received is allowed

Loans and Allowance for Credit Losses

when the collectability of the recorded investment in the loan is no longer in doubt and the loan

Long-term real estate mortgage loans generally have original maturities ranging up to 40 years,

does not have a remaining unrecovered charge-off associated with it. Nonaccrual loans may be

although the typical loan is 25 years or less. Short- and intermediate-term loans for agricultural

returned to accrual status when all contractual principal and interest are current, the borrower has

production or operating purposes generally have maturities of 10 years or less. Loans are carried

demonstrated payment performance, there are no unrecovered prior charge-offs, and collection of

at their principal amount outstanding adjusted for charge-offs, deferred loan fees or costs, and

future payments is no longer in doubt. If previously unrecognized interest income exists at the

purchase premiums or discounts. Interest on loans is accrued and credited to interest income

time the loan is transferred to accrual status, cash received at the time of or subsequent to the

based upon the daily principal amount outstanding. Loan origination fees and direct loan

transfer is first recorded as interest income until such time as the recorded balance equals the

origination costs are capitalized, and the net fee or cost is amortized over the estimated life of the

contractual indebtedness of the borrower.

related loan as an adjustment to yield.

Northwest FCS purchases loan and lease participations from other System and non-System entities

Impaired loans are loans for which it is probable that not all principal and interest will be collected

to generate additional earnings and diversify risk related to existing commodities financed and the

according to the contractual terms of the loan and are generally considered substandard or

geographic areas served. Additionally, Northwest FCS sells a portion of certain large loans to other

doubtful, which is in accordance with the loan rating model, as described below. Impaired loans

System and non-System entities to reduce risk and comply with established lending limits. Loans

include nonaccrual loans, restructured loans, and loans past due 90 days or more and still accruing

are sold following accounting requirements for sale treatment.

interest. A loan is considered contractually past due when any principal repayment or interest payment required by the loan instrument is not received on or before the due date. A loan shall

Northwest FCS uses a two-dimensional loan rating model based on internally generated combined

remain contractually past due until it is formally restructured or until the entire amount past due,

system risk rating guidance that incorporates a 14-point scale to identify and track the probability

including principal, accrued interest, and penalty interest incurred as the result of past due status,

of borrower default and a separate scale addressing loss given default over a period of time.

is collected or otherwise discharged in full.

Probability of default is the probability that a borrower will experience a default within 12 months from the date of the determination of the risk rating. A default is considered to have occurred if

Impaired loans are generally placed in nonaccrual status when principal or interest is delinquent

the lender believes the borrower will not be able to pay its obligation in full or the borrower is past

for 90 days or more (unless adequately secured and in the process of collection) or circumstances

due more than 90 days. The loss given default is management’s estimate as to the anticipated

economic loss on a specific loan assuming default has occurred, or is expected to occur within the

The reserve for unfunded lending commitments is based on management’s best estimate of losses

next 12 months.

inherent in lending commitments made to customers but not yet disbursed. Factors such as likelihood of disbursal and likelihood of losses given disbursement were utilized in determining this contingency.

Each of the probability of default categories carries a distinct likelihood of default. The 14-point scale provides for granularity of the probability of default, especially in the acceptable ratings. There are nine acceptable categories that range from a loan of the highest quality to a loan of

Investment in CoBank, ACB

minimally acceptable quality. The probability of default between 1 and 9 is very narrow and would

Northwest FCS' required investment in CoBank is in the form of Class A stock. The minimum

reflect almost no default to a minimal default percentage. The probability of default grows more

required investment is 4 percent of the prior year’s average direct loan volume. In addition,

rapidly as a loan moves from a “9” to other assets especially mentioned (10) and grows

Northwest FCS is required to capitalize its patronage-based participation loans sold to CoBank at 8

significantly as a loan moves to a substandard level (11). A substandard rating indicates that the

percent of Northwest FCS’ prior ten-year average balance of such participations sold to CoBank.

probability of default is high.

The investment in CoBank is composed of stock received as patronage and purchased stock. Accounting for this investment is on the cost plus allocated equities basis. Northwest FCS owned

The allowance is increased through provisions for loan losses and loan recoveries and is decreased

approximately 12 percent of the outstanding common stock of CoBank at December 31, 2013.

through reversals of provisions for loan losses and loan charge-offs. The allowance for loan losses is maintained at a level considered adequate by management to provide for probable and

Other Property Owned

estimable losses inherent in the loan portfolio. The allowance is based on a periodic evaluation of

Other property owned, consisting of real and personal property acquired through foreclosure or

the loan portfolio by management, in which numerous factors are considered, including economic

deed in lieu of foreclosure, is recorded at fair value less estimated selling costs upon acquisition.

conditions, loan portfolio composition, collateral value, portfolio quality, current production

Any initial reduction in the carrying amount of a loan to the fair value of the collateral received is

conditions, and prior loan loss experience. The allowance for loan losses encompasses various

charged to the allowance for loan losses. On at least an annual basis, revised estimates to the fair

judgments, evaluations and appraisals with respect to the loans and their underlying security that,

value are reported as adjustments to the carrying amount of the asset, provided that such

by their nature, contain elements of uncertainty, imprecision and variability. Changes in the

adjusted value is not in excess of the carrying amount at acquisition. Income and expenses from

agricultural economy and environment, and their impact on borrower repayment capacity, will

operations, losses on sales and carrying value adjustments are included in other expense on the

cause various judgments, evaluations and appraisals to change over time. Accordingly, actual

Consolidated Statement of Income. Gains on sales are included in other income on the

circumstances could vary significantly from Northwest FCS’ expectations and predictions of those

Consolidated Statement of Income.

circumstances. Management considers the following factors in determining and supporting the level of allowance for loan losses: the concentration of lending in agriculture, combined with

Premises and Equipment

uncertainties associated with farmland values, commodity prices, exports, government assistance

Premises and equipment are carried at cost less accumulated depreciation. Land is carried at cost.

programs, regional economic effects and weather-related influences.

Depreciation is provided on the straight-line method over the estimated useful lives of the assets. Gains and losses on dispositions are reflected in current operations. Maintenance and repairs are

The allowance for loan losses includes components for loans individually evaluated for impairment

charged to operating expense and significant improvements are capitalized.

and loans collectively evaluated for impairment. Generally, loans individually evaluated in the allowance for loan losses represent the difference between the recorded investment in the loan

Advanced Conditional Payments

and the present value of the cash flows expected to be collected, discounted at the loan’s effective

Northwest FCS is authorized under the Farm Credit Act to accept advance payments from

interest rate, or at the fair value of the collateral, if the loan is collateral dependent. For those

borrowers, which are classified as advance conditional payments and other interest-bearing

loans collectively evaluated for impairment, the allowance for loan losses is determined using an

liabilities on the Consolidated Balance Sheet. Advanced conditional payments are not insured.

estimate of expected losses based on historical experience for similar loans.

Interest is paid by Northwest FCS on such accounts.

Employee Benefit Plans

Northwest FCS accounts for income taxes under the liability method. Accordingly, deferred taxes

Substantially all employees of Northwest FCS participate in its Defined Benefit Pension Plan

are recognized for estimated taxes ultimately payable or recoverable based on federal, state, or

(Pension Plan) or the Farm Credit Foundations Defined Contribution/401(k) Retirement Plan

local laws.

(Defined Contribution Plan). Enrollment in the Pension Plan was curtailed in 1994. Existing employees who elected to transfer out of the Pension Plan and all new employees hired after

Northwest Farm Credit Services, ACA and its subsidiary, Northwest Farm Credit Services, PCA are

December 31, 1994, participate in the Defined Contribution Plan. The Pension Plan uses the “Entry

subject to federal income tax and pay state income taxes in Montana and Oregon. A declaratory

Age Normal Cost” actuarial method for funding purposes and the “Projected Unit Credit” actuarial

ruling was received from the Idaho State Tax Commission in late 2013 which determined that both

method for financial reporting purposes.

entities will be subject to state income tax in Idaho on a prospective basis. Both entities currently operate as cooperatives that qualify for tax treatment under Subchapter T of the Internal Revenue

The Defined Contribution Plan has two components. In this plan, Northwest FCS provides a

Code. Accordingly, under specified conditions, they can exclude from taxable income amounts

monthly contribution based on a defined percentage of the employee’s salary. Employees may also

distributed as qualified patronage refunds in the form of cash, stock, or allocated surplus.

defer a portion of their salaries in accordance with Section 401(k) of the Internal Revenue Code to

Provisions for income taxes are made only on those earnings that will not be distributed as

which Northwest FCS matches a certain percentage of employee contributions. Defined

qualified patronage refunds.

contribution costs are expensed in the same period that participants earn employer contributions and employer matching costs are expensed as funded.

Deferred taxes are recorded on the tax effect of all temporary differences based on the assumption that such temporary differences are retained by Northwest FCS and will therefore

Certain management or highly compensated employees who participate in the Pension plan also

impact future tax payments. A valuation allowance is provided against deferred tax assets to the

participate in a nonqualified Defined Benefit Restoration Plan (Restoration Plan) formally known as

extent that it is more likely than not (over 50 percent probability), based on management’s

the Northwest FCS Defined Benefit Restoration Plan. Each eligible employee whose retirement

estimate, that they will not be realized. The consideration of valuation allowances involves various

benefit under the Pension Plan is limited by Internal Revenue Code Sections 401(a) (17), 415, or

estimates and assumptions as to future taxable earnings, including the effects of Northwest FCS’

any Code provision or government regulations subsequently issued, will receive a benefit if these

expected patronage program, which reduces taxable earnings.

programs are continued. Under the present plan, the monthly benefit is equal to the difference between the participant’s actual monthly retirement benefit payment under the Pension Plan and

Deferred income taxes have not been provided by Northwest FCS on stock patronage distributions

the monthly retirement benefit payment that would be payable to the participant under the

received from the Bank prior to January 1, 1993, the adoption date of the FASB guidance on

Pension Plan if the limitations of Internal Revenue Code Sections 401(a) (17), 415, or any code

income taxes. Management’s intent is to permanently invest these and other undistributed

provision or government regulations subsequently issued, did not apply.

earnings in the Bank, or if converted to cash, to pass through any distribution related to pre-1993 earnings to Northwest FCS’ stockholders through qualified patronage allocations. Northwest FCS

Income Taxes

has not provided deferred income taxes on amounts allocated to Northwest FCS which relate to

As previously described, Northwest Farm Credit Services, ACA conducts its business activities

the Bank’s post-1992 earnings to the extent that such earnings will be passed through to

through two wholly owned subsidiaries. Long-term mortgage lending activities are operated

Northwest FCS’ stockholders through qualified patronage allocations. Additionally, deferred income

through a wholly owned FLCA subsidiary which is exempt from federal and state income tax.

taxes have not been provided on the Bank’s post-1992 unallocated earnings. The Bank currently

Short- and intermediate-term lending activities are operated through a wholly owned PCA

has no plans to distribute unallocated Bank earnings and does not contemplate circumstances that,

subsidiary. Operating expenses are allocated to each subsidiary based on estimated relative

if distributions were made, would result in taxes being paid by Northwest FCS.

service. Transactions between the subsidiaries and the parent company have been eliminated upon consolidation. The ACA, along with the PCA subsidiary, is subject to income taxes.

Patronage Distributions from CoBank, ACB

accounting qualifications will not be met and believes the transactions will continue to be recorded

Northwest FCS records patronage distributions from CoBank on an accrual basis. Under the current

in the manner described in Note 17 of these Consolidated Financial Statements.

CoBank capital plan, the bank distributes patronage from Northwest FCS’ direct lending business in cash. For patronage applicable to participations sold to CoBank, patronage is distributed in 75

Other Comprehensive Income (Loss)

percent cash and 25 percent Class A stock.

Other comprehensive income (loss) is a measure of all changes in the equity of Northwest FCS as a result of recognized transactions and other economic events of the period other than capital

Derivative Instruments and Hedging Activity

transactions with the stockholders. Other comprehensive income (loss) refers to revenue,

In the normal course of business, Northwest FCS enters into derivative financial instruments

expenses, gains and losses that under GAAP are recorded as an element of members’ equity and

(derivatives) that are principally used to manage interest rate and foreign currency exchange rate

comprehensive income but are excluded from net income. Other comprehensive loss is comprised

risk on assets. Derivatives are recorded on the Consolidated Balance Sheet as Other assets and

of adjustments related to Northwest FCS’ Pension Plan and Restoration Plan as well as adjustments

Other liabilities at fair value.

related to its derivative contracts used to manage interest rate and exchange rate risk on assets.

Changes in the fair value of derivatives are recorded in current period earnings or accumulated

Fair Value Measurements

other comprehensive income (loss), depending on the use of the derivative and whether it qualifies

Accounting guidance defines fair value, establishes a framework for measuring fair value, and

for hedge accounting. For fair-value hedge transactions that hedge changes in the fair value of

expands disclosures about fair value measurements. It describes three levels of inputs that may be

assets, liabilities, or firm commitments, changes in the fair value of the derivative are recorded in

used to measure fair value:

earnings and will generally be offset by changes in the hedged item’s fair value. For cash-flow hedge transactions, in which Northwest FCS is hedging the variability of future cash flows related

Level 1 – Quoted prices in active markets for identical assets or liabilities that the reporting entity

to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the

has the ability to access at the measurement date. Level 1 assets include assets held in trust

derivative will generally be deferred and reported in accumulated other comprehensive income

funds, which relate to amounts in a deferred compensation and a supplemental retirement plan.

(loss). The gains and losses on the derivative that are deferred and reported in accumulated other

The trust funds include investments that are actively traded and have quoted net asset values that

comprehensive income (loss) will be reclassified as earnings in the periods in which earnings are

are observable in the marketplace. Pension plan assets that are invested in equity securities,

impacted by the variability of the cash flows of the hedged item. The ineffective portion of all

including mutual funds, and fixed-income securities that are actively traded are also included in

hedges is recorded in current period earnings. For derivatives not designated as a hedging

Level 1.

instrument, the related change in fair value is recorded in current period earnings. Level 2 – Observable inputs other than quoted prices included within Level 1 that are observable Northwest FCS formally documents all relationships between hedging instruments and hedged

for the asset or liability either directly or indirectly. Level 2 inputs include the following: (a) quoted

items, as well as its risk management objectives and strategies for undertaking hedge transactions.

prices for similar assets or liabilities in active markets; (b) quoted prices for identical or similar

This process includes linking all derivatives that are designated as fair-value or cash-flow hedges to

assets or liabilities in markets that are not active so that they are traded less frequently than

(1) specific assets or liabilities on the Consolidated Balance Sheet, or (2) firm commitments or

exchange-traded instruments, the prices are not current or principal market information is not

forecasted transactions. Northwest FCS also formally assesses (at the hedge’s inception and on an

released publicly; (c) inputs other than quoted prices that are observable such as interest rates

ongoing basis) whether the derivatives that are used in hedging transactions have been highly

and yield curves, prepayment speeds, credit risks and default rates and (d) inputs derived

effective in offsetting changes in the fair value or cash flows of hedged items and whether those

principally from or corroborated by observable market data by correlation or other means. Pension

derivatives may be expected to remain highly effective in future periods. Due to the structure of

plan assets that are derived from observable inputs, including corporate bonds and mortgage-

Northwest FCS’ current derivative transactions, management has no reason to believe that hedge

backed securities are reported in Level 2. This category includes derivative contracts.

Level 3 – Unobservable inputs are those that are supported by little or no market activity and that

NOTE 3 > Loans and Allowance for Loan Losses

are significant to the fair value of the assets or liabilities. These unobservable inputs reflect the

Northwest FCS’ portfolio is comprised of a wide array of commodities and product offerings.

reporting entity’s own assumptions about factors that market participants would use in pricing the

Northwest FCS has specialized staff and has tailored financial products to effectively serve these

asset or liability. Level 3 assets and liabilities include financial instruments whose value is

diversified markets. A summary of loans follows:

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 investments, retained residual interests in securitizations, asset-backed securities, highly structured or long-term derivative contracts as well as loans, investments in system entities, and other property owned. Pension plan assets 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 11, Note 14, and Note 16.

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 to a third party. These letters of credit are issued to facilitate commerce and typically result in the

Northwest FCS may purchase or sell loan participation interests with other parties in order to

commitment being funded when the underlying transaction is consummated between the customer

diversify risk, manage loan volume and comply with FCA regulations. The following table presents

and third party. The credit risk associated with commitments to extend credit and commercial

information regarding participations purchased and sold as of December 31, 2013. Participations

letters of credit is essentially the same as that involved with extending loans to customers and is

purchased volume in the table excludes similar entity syndications and purchases of other interests

subject to normal credit policies. Collateral may be obtained based on management’s assessment

in loans:

of the customer’s creditworthiness.



Northwest FCS' concentration of credit risk in various agricultural commodities and industries is shown in the following table, which includes accrued interest:

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



Doubtful – assets exhibit similar weaknesses to substandard assets; however, doubtful assets have additional weaknesses in existing factors, conditions and values that make collection in full highly questionable; and,



Loss – assets are considered uncollectible.

The following table shows loans and related accrued interest classified under the FCA Uniform Loan Classification System as a percentage of total loans and related accrued interest receivable by loan type as of December 31:

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 current loss exposure is considered in the determination of the allowance for loan losses in the consolidated financial statements. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies but typically includes farmland and income-producing property, such as crops and livestock, machinery and equipment 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 property’s appraised value. However, a decline in a property’s market value subsequent to loan origination or advances, or other actions necessary to protect the financial interest of Northwest FCS in the collateral, may result in loan-to-value ratios in excess of the regulatory maximum. One credit quality indicator utilized by Northwest FCS is the FCA 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;

Nonperforming assets consist of impaired loans and other property owned. The following table presents these nonperforming assets in a more detailed manner than the previous table. The nonperforming assets, including related accrued interest where applicable, are as follows:

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, including accrued interest, where applicable:

Commitments to lend additional funds to debtors whose loans were classified as impaired at December 31, 2013, 2012, and 2011 totaled $6,648, $8,447, and $15,023, respectively.

Additional impaired loan information, including related accrued interest where applicable, as of December 31, 2013, 2012, and 2011 is as follows:

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

Interest income on nonaccrual and accruing restructured loans that would have been recognized under the original terms of the loans were as follows:

The variance between the interest income recognized in the current period and interest income that would have been recognized under the original terms for the year ended December 31, 2013, is the result of recapture of interest income contractually due in prior periods. The following tables provide an aging analysis of past due loans and accrued interest:

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 a market transaction. Concessions vary, are borrower specific, and may include any of the following: interest rate reductions, term extensions or adjustments, or loan reamortization. In rare cases, principal obligations may be reduced.

The following table presents additional information regarding troubled debt restructurings that

The following table provides information on outstanding loans restructured in troubled debt

occurred during the years ended December 31, 2013, 2012, and 2011:

restructurings (TDRs) as of December 31 2013, 2012, and 2011. These loans are included as impaired loans in the impaired loans table.

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

During 2013, troubled debt restructurings that occurred within the previous 12 months and for which there was a subsequent payment default during the period totaled $4,033, of which $3,482 was classified as real estate mortgage and $551 was classified as rural home loans. During 2012, troubled debt restructurings that occurred within the previous 12 months and for which there was a subsequent payment default during the period totaled $105, substantially all were classified as real estate mortgages. 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. At December 31, 2013, additional commitments to lend to borrowers whose loans have been modified in troubled debt restructurings were $4,188.

Summaries of the changes in the allowance for loan losses and the ending balance of loans and accrued interest outstanding as of December 31, 2013, 2012, and 2011 are as follows:

A summary of the changes in the reserve for unfunded lending commitments follows:

fee. As of December 31, 2013, 2012, and 2011 there were no loans remaining under this agreement. During 2007, 2004, and 2002, Northwest FCS entered into credit default swaps with Mt. Spokane 2007-A LLC (2007 LLC), Mt. Spokane 2004-A LLC (2004 LLC), and Mt. Spokane Trust 2002-A (Trust), respectively, for credit enhancement purposes. Each of the agreements will remain in place over the life of the loans under the swap agreement, and fees are paid accordingly based on the volume of the loans under the agreements. At the establishment of each agreement,

To mitigate the risk of loans being placed in nonaccrual status, Northwest FCS had entered into

Northwest FCS capitalized costs of $1,601, $2,318 and $2,618, respectively, all of which have been

long-term standby commitments to purchase agreements with the Federal Agricultural Mortgage

fully amortized as of December 31, 2013. The following discussion provides the key provisions of

Corporation (Farmer Mac). The agreements, which were effectively credit guarantees that

each of the agreements.

remained in place until the loans were paid in full, gave Northwest FCS the right to sell the loans identified in the agreements to Farmer Mac after four months of delinquency. In December 2011,

2007 LLC

Northwest FCS and Farmer Mac agreed to terminate the aforementioned agreement without

Pursuant to the credit default swap, following the occurrence of a known loss, the 2007 LLC will be

further obligation by either party. Northwest FCS paid Farmer Mac $550 as part of the termination

required to pay an amount to Northwest FCS equal to the principal amount of the defaulted loan

agreement. There was no activity related to Farmer Mac in 2013 or 2012. Fees for such

plus covered interest and costs less any recoveries. No payment is due to Northwest FCS until

commitments totaled $864 for the year ended December 31, 2011, which includes the termination

Northwest FCSâ&#x20AC;&#x2122; Retained First Loss Notional Amount is reduced to zero. In addition to loss events, proportionate reductions in the Retained First Loss Notional Amount will occur due to reductions of

the Aggregate Notional Amount of the Reference obligations associated with non-loss events such

Trust and 2004 LLC are variable interest entities created by Bank of America to acquire eligible

as repayment of loan principal. As of December 31, 2013, the balance of the Retained First Loss

securities, which will be used as collateral to secure the Failure to Pay Credit Event payment of the

Notional Amount was $2,309. The maximum amount of losses the 2007 LLC will be required to pay

Trust or 2004 LLC under a credit default swap with Northwest FCS. The securities are held in the

under the credit default swap was $15,004 and $233 of losses have been incurred by Northwest

form of direct obligations of, and obligations fully guaranteed as to timely payment of principal and

FCS.

interest by, the United States of America. Included are obligations of the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Federal Home Loan Bank or obligations of any agency or instrumentality of the United States of America the obligations of

2004 LLC

which are backed by the full faith and credit of the United States of America.

Pursuant to the credit default swap, following the occurrence of a known loss, the 2004 LLC will be required to pay an amount to Northwest FCS equal to the principal amount of the defaulted loan

2007 LLC is also a variable interest entity created by Lehman Brothers to acquire eligible securities,

plus covered interest and costs less any recoveries. As of December 31, 2013, the maximum

which will be used as collateral to secure the Failure to Pay Credit Event payment of the 2007 LLC

amount of losses the 2004 LLC will be required to pay under the credit default swap was $10,328

under a credit default swap with Northwest FCS. The bankruptcy of Lehman Brothers in 2008 did

and $259 of losses have been incurred by the 2004 LLC.

not have an economic impact on the 2007 LLC. The securities are limited to direct obligations of, and obligations fully guaranteed as to timely payment of principal and interest by, the United

Trust

States of America or obligations of any agency or instrumentality of the United States of America,

During 2012, Northwest FCS exercised its right to redeem the Trust transaction as the outstanding

the obligations of which are backed by the full faith and credit of the United States of America.

balance was below 10 percent of the original balance as of June 30, 2012. The impacts of

Eligible securities, however, will not include “real estate mortgages” (or interest therein) as defined

unwinding this transaction to Northwest FCS’ financial position, capital ratios and credit quality

in Section 7701(i) of the Internal Revenue Code and the accompanying United States Treasury

were minimal.

Regulations. Management has evaluated these variable interest entities and concluded that they are not subject to consolidation.

The following tables provide information related to loan balances, fees and amortization pertaining to the aforementioned credit default swap agreements:

NOTE 4 > Investment in CoBank, ACB At December 31, 2013, Northwest FCS’ investment in CoBank is in the form of Class A stock with a par value of $100 per share. Northwest FCS is required to own stock in CoBank to capitalize its direct loan balance and participation loans sold to CoBank. The current requirement for capitalizing its direct loan from CoBank is 4 percent of Northwest FCS’ prior year average direct loan balance. The 2013 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 from CoBank related to these participations sold is paid 75 percent cash and 25 percent Class A stock. The capital plan is evaluated annually by CoBank’s board and management and is subject to change. The fair value of Northwest FCS’ investment in CoBank is considered to approximate its cost. 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

the Act and regulations. In making such a capital call, the Bank shall take into account the financial

NOTE 6 > Other Property Owned

condition of each such holder and such other considerations, as it deems appropriate.

Net losses on other property owned consist of the following:

NOTE 5 > Premises and Equipment Premises and equipment consist of the following:

The Farm Credit Act requires that mineral rights acquired after 1985 through foreclosure be sold to the buyer of the surface rights in the land. Northwest FCS retains certain mineral interests in land acquired through foreclosure and sale proceedings prior to this requirement and in accordance with the Farm Credit Act, for which it receives income from leases and royalties. These intangible assets have no recorded value on the Consolidated Balance Sheet. Income earned on these mineral rights for the years ended December 31, 2013, 2012, and 2011 were $7,765, $6,420, and

Estimated useful lives are as follows: buildings are 30 years, improvements and leaseholds are the

$5,175, respectively, which are included in Other income on the Consolidated Statement of

lesser of remaining lease term or 10 years, and furniture and equipment are 1 to 7 years. Land is

Income.

not depreciated. During 2013, Northwest FCS sold the remaining owned building and land for a gain of $542.

NOTE 7 > Note Payable to CoBank, ACB Northwest FCSâ&#x20AC;&#x2122; indebtedness to CoBank represents borrowings by Northwest FCS to fund its loan

Northwest FCS is obligated under various operating leases for certain office space and equipment.

portfolio. This indebtedness is collateralized by a pledge of substantially all of Northwest FCSâ&#x20AC;&#x2122;

Rental expense under these operating leases was $6,687, $6,403, and $6,352 for the years ended

assets and is governed by a General Financing Agreement (GFA), which provides Northwest FCS

December 31, 2013, 2012, and 2011, respectively. At December 31, 2013, future minimum lease

an open-ended revolving line of credit. The GFA and other term structures available to Northwest

payments for leases are as follows:

FCS from CoBank are subject to periodic renewals in the normal course of business. Each debt obligation has its own term and rate structure. Northwest FCS was in compliance with the terms and conditions of the GFA as of December 31, 2013. The weighted average interest rate for all debt was 1.59, 1.66, and 1.94 percent at December 31, 2013, 2012, and 2011, respectively. The GFA will expire on May 31, 2018 and management expects renewal of the GFA at that time. Through the direct note to the bank, Northwest FCS is liable for the following:

The capital lease payments in the above table include $734 of interest; the total present value of minimum capital lease payments at December 31, 2013 is $1,608.

Fixed rate debt typically has original maturities ranging from 1 to 30 years. Floating rate notes

Capital Stock and Participation Certificates

generally have maturities ranging from 1 month to 9 years. Discount notes have maturities from

In accordance with the Farm Credit Act and Northwest FCS’ capitalization bylaws, each borrower is

one day to 365 days. The revolving line of credit is renewed annually and is priced at the overnight

required to invest in Northwest FCS as a condition of borrowing. Borrowers acquire ownership of

funds rate.

capital stock or participation certificates at the time the loan is made but usually do not make a cash investment. Effective November 19, 2012, the aggregate par value of the stock is treated as a

The maturities of debt within the direct note to the Bank as of December 31, 2013 are shown

non-interest bearing receivable from the customer. Prior to November 19, 2012, the aggregate par

below:

value of the stock was added to the principal amount of the related loan obligation. At the time this change occurred, approximately $13,169 was transferred from loans to Other assets on the Consolidated Balance Sheet. Northwest FCS retains a first lien on common stock or participation certificates owned by its borrowers. Pursuant to provisions of the Farm Credit Act, the System’s minimum initial borrower investment requirement is one thousand dollars or 2 percent of the related loan balance on a per customer basis, whichever is less. The bylaws of Northwest FCS provide its Board of Directors with the authority to modify the capitalization requirements for new loans subject to a maximum of 4

At December 31, 2013, callable debt was $783,000, with a range of call dates between January

percent of the related loan balance.

2014 and March 2018. Retirement of equities noted above will be at the lower of par or book value, and repayment of a Under the Farm Credit Act, Northwest FCS is obligated to borrow only from CoBank, unless CoBank

loan does not automatically result in retirement of the corresponding stock or participation

gives approval to borrow elsewhere. CoBank, consistent with FCA regulations, has established

certificates. Northwest FCS' Board of Directors considers the current and future status of

limitations on Northwest FCS’ ability to borrow funds based on specified factors or formulas

permanent capital requirements before authorizing any retirement of at-risk equities. Pursuant to

relating primarily to credit quality and financial condition. At December 31, 2013, Northwest FCS’

FCA regulations, should Northwest FCS fail to satisfy its minimum permanent capital requirements,

note payable is within the specified limitations.

retirements of at-risk equities subsequent to such noncompliance would be prohibited, except for retirements in the event of default or loan restructuring.

Northwest FCS has 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

Protected Borrower Stock

intended to provide liquidity for disaster recovery or other emergency situations. At December 31,

Protection of certain borrower stock (Class B participation certificates) is provided under the Farm

2013, no balance was outstanding on this line of credit. Additionally, until December 2012,

Credit Act, which requires Northwest FCS, when retiring protected borrower stock, to retire such

Northwest FCS had a letter of credit facility with Bank of America to support letters of credit issued

stock at par value or stated value regardless of its book value. Protected borrower stock includes

on Industrial Revenue Bonds. This relationship was discontinued in 2012.

capital stock and participation certificates issued prior to October 6, 1988. As of December 31, 2013, Northwest FCS had no remaining protected borrower stock outstanding, as the last

NOTE 8 > Members’ Equity

remaining balance was retired during 2011.

A description of Northwest FCS' capitalization requirements, protection mechanisms, regulatory capitalization requirements and restrictions, and equities are provided below.

Regulatory Capitalization Requirements and Restrictions

exceed its par value. At December 31, 2013, there were 93,501 units outstanding with a total par

The FCA's capital adequacy regulations require Northwest FCS to maintain permanent capital of 7

value of $467.

percent of average risk-adjusted assets and off-balance-sheet commitments. Failure to meet this Northwest FCS is authorized to issue 100 million shares of Class D Nonvoting stock to the Bank

requirement can initiate certain mandatory and possibly additional discretionary actions by the FCA that, if undertaken, could have a direct material effect on Northwest FCS’ financial statements.

with a par value of 5 dollars per share. Class D Nonvoting stock is not transferable and is required

Northwest FCS is prohibited from reducing permanent capital by retiring stock or making certain

to be issued for cash, with Northwest FCS having no authority to require additional capital

other distributions to stockholders unless prescribed capital standards are met. The FCA

contributions. Retirement and earnings distributions are subject to statutory and regulatory

regulations also require additional minimum standards for capital be maintained. These standards

restrictions. At December 31, 2013 there were no Class D Nonvoting shares outstanding.

require all System institutions to achieve and maintain ratios of total surplus as a percentage of risk-adjusted assets of 7 percent and of core surplus (generally unallocated retained earnings) as a

Voting common stock is converted to nonvoting common stock two years after the owner of the

percentage of risk-adjusted assets of 3.5 percent. Northwest FCS’ permanent capital, core surplus,

stock ceases to be a borrower or immediately if the former borrower becomes ineligible to borrow

and total surplus ratios at December 31, 2013, were 14.7 percent, 14.6 percent, and 14.6 percent,

from Northwest FCS. Nonvoting common stockholders are eligible to participate in other services

respectively. Management is not aware of any reasons why Northwest FCS’ regulatory capital

offered by Northwest FCS. Each owner or the joint owners of voting common stock is entitled to a

requirements would not be met in 2014, nor is it currently prohibited from retiring stock or

single vote regardless of the number of shares held, while nonvoting common stock and

distributing earnings or expected to be in 2014.

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.

An existing regulation empowers FCA to direct a transfer of funds or equities by one or more System institutions to another System institution under specified circumstances. This regulation

Losses that result in impairment of capital stock and PCs would be allocated to such equities on a

has not been utilized to date. Northwest FCS has not been called upon to initiate any such

prorated basis. Upon liquidation of Northwest FCS, at-risk capital stock and participation

transfers and is not aware of any proposed action under this regulation.

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.

Description of Equities Northwest FCS is authorized to issue an unlimited number of shares of Class A common stock and

Patronage

up to 500 million units of Class A participation certificates (PCs) with a par value of 5 dollars per share. Class B PCs with a par value of 5 dollars per share are no longer being issued, and all were

Northwest FCS’ bylaws provide for the payment of patronage distributions. All patronage

retired as of December 31, 2011.

distributions to eligible stockholders shall be on a proportionate patronage basis as may be approved by Northwest FCS’ Board of Directors, consistent with the requirements of Subchapter T

Class A common stock is at-risk, has voting rights, and may be retired at the discretion of

of the Internal Revenue Code. For the years ending December 31, 2013, 2012, and 2011, the

Northwest FCS' Board of Directors and, if retired, shall be retired at its book value, not to exceed

Board approved cash patronage distributions of $58,134, $55,245, and $53,264, respectively.

its par value. At December 31, 2013, there were 2,500,555 shares outstanding with a total par

Patronage distributions are recorded on an accrual basis, based on estimated amounts. The

value of $12,503.

difference between the estimated accrual and the actual patronage distribution is reflected in retained earnings in the year paid. In December 2013, the Board of Directors of Northwest FCS

Class A PCs are at-risk and do not have voting rights. Class A PCs may be retired at the discretion

approved a resolution to distribute a portion of 2014 earnings in the form of patronage dividends

of Northwest FCS' Board of Directors and, if retired, shall be retired at its book value, not to

to its stockholders. The patronage dividend will be accrued in 2014 and declared and paid in 2015.

All earnings not distributed as qualified patronage allocations or appropriated for some other

The following table presents activity in the accumulated other comprehensive income (loss), net of

purpose are retained as unallocated retained earnings. At December 31, 2013, all accumulated

tax by component:

earnings are retained as unallocated retained earnings. In accordance with Internal Revenue Service requirements, each stockholder is sent a nonqualified written notice of allocation. Allocated, but not distributed patronage refunds, are included as unallocated retained earnings account. Such allocations may provide a future basis for a distribution of capital. The Board considers these unallocated retained earnings to be permanently invested in the Association. As such, there is no current plan to revolve or redeem these amounts. No express or implied right to have such capital retired or revolved at any time is granted. Other Accumulated Comprehensive Loss Northwest FCS reports accumulated other comprehensive loss as a component of membersâ&#x20AC;&#x2122; equity, which is reported net of taxes as follows:

The following table represents reclassifications out of accumulated other comprehensive income

The provision for income tax differs from the amount of income tax determined by applying the

(loss):

applicable U.S. statutory federal income tax rate to pretax income as follows:

Deferred tax assets and liabilities are comprised of the following:

NOTE 9 > Patronage Distributions from Farm Credit Institutions Patronage income recognized from Farm Credit Institutions to Northwest FCS totaled $43,490, $42,028, and $39,833 for the years ended December 31, 2013, 2012, and 2011, respectively. Of this amount $38,939, $38,820, and $38,077 for the years ended December 31, 2013, 2012, and 2011, respectively, was from CoBank. Patronage distributed from CoBank was in cash and stock. The amount declared in December 2013 was accrued and will be paid by CoBank in 2014.

NOTE 10 > Income Taxes The provision for income taxes follows: The calculation of deferred tax assets and liabilities involves various management estimates and assumptions as to the future taxable earnings, including the amount of non-patronage income and patronage income retained. The expected future tax rates are based upon enacted tax laws. Northwest FCS recorded a valuation allowance of $24,524, $35,434, and $25,139 during 2013, 2012, and 2011, respectively. Northwest FCS will continue to evaluate the realizability of the deferred tax assets and adjust the valuation allowance accordingly. During 2012, Northwest FCS established a liability of $1,000 for an uncertain tax position related to a state tax position. During 2013, it was determined through interactions with the state taxing authority that the position was sustainable and as such the uncertain tax liability was reversed

For a limited number of highly-compensated participants in the Pension Plan mentioned above,

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Northwest FCS also has a Restoration Plan that provides retirement benefits above the Internal Revenue Code compensation limit for eligible individuals. The Pension Plan was closed to new participants beginning January 1, 1995 and is noncontributory. Benefits are based on salary and years of service. The following tables set forth the obligations and funded status of Northwest FCS’ Pension Plan and Restoration Plan. As of December 31, 2013, there were no amounts of unrecognized tax positions that, if recognized

The funding status and the amounts recognized in the Consolidated Balance Sheet for post-

would impact the effective tax rate. Northwest FCS does not have any positions for which it is

retirement benefit plans follows:

reasonably possible that the total amounts of unrecognized tax positions will significantly increase or decrease within the next 12 months. Northwest FCS recognizes interest and penalties related to unrecognized tax positions as an adjustment to income tax expense. As the previously unrecognized tax position was recognized during 2013, no interest or penalties were recorded for the year ended December 31, 2013. Tax years that remain open for federal and state income tax jurisdictions are generally 2010 and forward.

NOTE 11 > Employee Benefit Plans Certain employees of Northwest FCS participate in a Pension Plan. The Department of Labor has determined the plan to be a governmental plan; therefore, the plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA). As the plan is not subject to ERISA, the plan’s benefits are not insured by the Pension Benefit Guaranty Corporation. Accordingly, the amount of accumulated benefits that participants would receive in the event of the plan’s termination is contingent on the sufficiency of the plan’s net assets to provide benefits at that time. While the plan is a governmental plan and is not subject to minimum funding requirements, Northwest FCS contributes amounts necessary on an actuarial basis to provide the plan with sufficient assets to meet the benefits to be paid to participants. The amounts ultimately to be contributed and to be recognized as expense as well as the timing of those contributions and expenses, are subject to many variables including performance of plan assets and interest rate levels. These variables could result in actual contributions and expenses being greater than or less than anticipated.

The estimated net loss for the Pension Plan and Restoration Plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2014 is $970 and $36, respectively. There are no remaining prior service costs in accumulated other comprehensive loss as of December 31, 2013. The projected benefit obligation, accumulated benefit obligation and the fair value of plan assets

Weighted average assumptions used to determine benefit obligations at December 31:

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:

Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31:

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 risks. A Board of Trustees (Trustees), called the

The components of net periodic pension expense and other amounts recognized in other

Farm Credit Foundations Trust Committee, comprised of certain members of senior management

comprehensive income are as follows:

of the participating employers, supervises the investment assets of the plans on behalf of the employers. The Trustees adopt an asset allocation strategy for each plan that reflects return and risk objectives, plan liabilities, and other factors. During 2013, the Trustees employed a total return investment approach whereby a mix of equities, fixed income and real estate investments were used to maximize the long-term return of plan assets for a prudent level of risk. The investment portfolio was designed to contain a diversified blend of equity and fixed income investments. Furthermore, equity investments were diversified across U.S. and non-U.S. stocks as well as growth, value, small, mid and large capitalizations. During the fourth quarter of 2013, the Trust Committee adopted new investment policies that will guide plan investment strategies for 2014. The new policies incorporate a liability-based framework in which assets are managed to the unique liabilities of each plan. The overall objectives of these policies are intended to meet the benefit obligations for the plan beneficiaries and to earn a long-term rate of return consistent with the related cash flow profile of the underlying benefit obligations.

The execution of these policies permits the plans to pursue a well-defined risk management strategy

investments and 30 percent of assets in liability hedging investments. Specifically, return seeking

that is designed to reduce investment risks as the funded status improves; this is achieved through a

investments include: global equity securities, global real estate investment trust securities, hedge

dynamically driven allocation process that measures assets and liabilities daily. To implement these

funds, and high yield bonds; and liability hedging investments include high quality credit debt

policies, the plans have adopted a diversified set of portfolio management strategies to optimize the

securities. Tactical tilts will be employed based on the asset consultant’s medium term views and

risk reward profile of the plans. Plan assets are divided into two primary component portfolios:

capital market assumptions, but will remain within stated policy ranges. The plan assets were reallocated to comply with the approved investment strategy during January 2014. Proceeding with



A return-seeking portfolio that is invested in a diversified set of assets designed to deliver

the new strategies, portfolios will be measured and monitored daily to ensure compliance with

performance in excess of the underlying liability growth rate coupled with diversification

investment policies.

controls regarding the level of risk. Equity exposures are expected to be the primary drivers



of excess returns, but also introduce the greatest level of volatility of returns. Accordingly, the

The expected long-term rate of return assumption is determined by the Farm Credit Foundations

return-seeking portfolio will contain additional asset classes that are intended to diversify

Plan Sponsor Committee (Plan Sponsor Committee) with input from the Trust Committee. The Plan

equity risk as well as contribute to excess return.

Sponsor Committee is comprised of certain members of senior management and boards of directors of the participating employers. Historical return information is utilized to establish a best-

A liability hedging portfolio that is primarily invested in intermediate-term and long-term

estimate range for each asset class in which the plan is invested. The most appropriate rate is

investment grade corporate bonds in actively managed strategies that are intended to hedge

selected from the best-estimate range, taking into consideration the duration of plan benefit

interest rate risk. The portfolio will progressively increase in size as each plan’s funded ratio

liabilities and plan sponsor investment policies.

improves. The use of selected portfolio strategies incorporating derivatives may be employed to improve the liability hedging characteristics or reduce risk. Finally, there is a managed

The fair values of the Pension Plan assets at December 31, 2013 by asset category are as follows:

liquidity portfolio that is composed of short-term assets intended to pay periodic plan benefits and expenses. The largest subset will contain U.S. equities including securities that are both actively and passively managed to their benchmarks across a full spectrum of capitalization and styles. Non-U.S. equities will contain securities in both passively and actively managed strategies. Currency futures and forward contracts may be held for the sole purpose of hedging existing currency risk in the portfolio. Other investments that will serve as equity diversifiers will include high yield bonds: fixed income portfolio of securities below investment grade including up to 30 percent of the portfolio in non-U.S. issuers, global real estate securities: portfolio of diversified real estate investment trust and other liquid real estate related securities and hedge fund of funds. These portfolios combine income generation and capital appreciation opportunities from developed markets globally. Other investment strategies may be employed to gain certain market exposures, reduce portfolio risk and to further diversify portfolio assets.

During 2013, the asset allocation policy of the pension plan provided a target of 60 percent of assets in equity securities, 35 percent in debt securities and 5 percent in real estate. For 2014, the asset allocation policy of the pension plan provides a target of 70 percent of assets in return seeking

Northwest FCS does not expect to make contributions to its Restoration Plan or the Pension Plan in 2014. Employees not eligible to participate in the Pension Plan participate in the Defined Contribution Plan, which is in accordance with Section 401 of the Internal Revenue Code. The Defined Contribution Plan requires the employer to contribute 3 percent of eligible employee compensation for eligible employees. For eligible employees hired prior to January 1, 2007, up to an additional 5 percent of compensation in excess of the employee social security wage base is available. Defined

Pension Plan assets are diversified into various investment types as shown in the preceding table.

Contribution Plan expense recorded by Northwest FCS was $1,682, $1,546, and $1,486 in 2013,

An investment consultant is utilized to ensure the diversification of assets. The assets are spread

2012, and 2011, respectively.

among numerous fund managers. Diversification is also obtained by selecting fund managers whose funds are not concentrated in individual stocks and, for the case of international funds,

All Northwest FCS employees may elect to defer a portion of their salaries in accordance with IRS

individual countries.

rules. For employees participating in the Pension Plan, Northwest FCS matches employee contributions up to a maximum of 100 percent of the employeesâ&#x20AC;&#x2122; first 2 percent of eligible earnings

Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active

and 50 percent on the next 4 percent of eligible earnings. For employees participating in the

markets would be classified as Level 1. Inputs other than quoted prices included in Level 1 that are

Defined Contribution Plan, Northwest FCS matches employee contributions up to a maximum of

observable for the asset or liability through corroboration with observable market data would be

100 percent on the employeesâ&#x20AC;&#x2122; first 6 percent of eligible earnings. Employer matching contributions

classified as Level 2. In addition, assets measured at Net Asset Value (NAV) per share and may be

were $3,140, $2,297, and $2,182 for the years ended December 31, 2013, 2012, and 2011,

redeemed at NAV per share at the measurement date are classified as Level 2.

respectively.

Unobservable inputs (e.g. a companyâ&#x20AC;&#x2122;s own assumptions and data) and assets measured at NAV

The senior officer compensation package, as administered by the Board Compensation Committee,

per share which may not be redeemed at NAV per share at the measurement date would be

includes a long-term incentive and retention program designed to retain senior management and

classified as Level 3. All assets are evaluated at the fund level.

incent them for achieving certain specified personal and corporate goals. During the year ended December 31, 2012, the Board approved a new long-term incentive plan (LTIP) for senior

There were no significant transfers in or out of Levels 1, 2, or 3 during the year.

management which began in 2012. The LTIP was only available to senior management and included a single year plan and a multi-year plan beginning in 2012 for 2012-2013. In 2013, the

The following table presents the expected future payments, which reflect expected future service,

LTIP included a plan year which covered 2013-2014 and 2013-2015.

as appropriate, from the Pension Plan and Restoration Plan.

NOTE 12 > Related Party Transactions In the ordinary course of business, Northwest FCS enters into loan transactions with directors, their immediate families, their affiliated organizations and affiliated organizations of senior officers. Such loans are made on the same terms, including interest rates, amortization schedules and collateral requirements, as those prevailing at the time for comparable transactions with unrelated borrowers. Senior officers and their immediate families are precluded from obtaining loans from Northwest FCS.

The investment in FPI was $1,493 as of December 31, 2013, which was included in Other assets

Loan information to related parties for the years ended December 31 is shown below:

on the Consolidated Balance Sheet. Expenses recorded related to FPI for the years ended December 31, 2013, 2012, and 2011 were $13,965, $11,646, and $10,211, respectively, which are included within Other operating expenses on the Consolidated Statement of Income. As of December 31, 2013, Northwest FCSâ&#x20AC;&#x2122; investment in AgDirect was $18,819, which was included in Other assets on the Consolidated Balance Sheet. The repayments and other above reflects changes in related parties for the respective periods.

As of December 31, 2013, Northwest FCS had a 25.75 percent participation interest in ProPartners

In the opinion of management, none of these loans outstanding at December 31, 2013 involved

loans originated after September 1, 2012, resulting in $235,632 included in Loans on the

more than a normal risk of collectability.

Consolidated Balance Sheet.

In the ordinary course of business, Northwest FCS enters into certain other transactions with

As of December 31, 2013, Northwest FCS had equity ownerships in the following Unincorporated

directors and their affiliated entities. These transactions for products and services are available to

Business Entities, which were all formed for the purpose of acquiring and managing unusual or

all customers and are made on the same terms prevailing at the time for comparable transactions

complex collateral associated with loans.

with unrelated customers. Northwest FCS also recognized $38,939, $38,820, and $38,077 of patronage distributions from CoBank for the years ended December 31, 2013, 2012, and 2011, respectively. As of December 31, 2013, Northwest FCSâ&#x20AC;&#x2122; investment in CoBank was $319,483, which is included in Assets on the Consolidated Balance Sheet.

NOTE 13 > Regulatory Enforcement Matters

In the normal course of business Northwest FCS purchases loan participations from CoBank and

No FCA regulatory enforcement actions currently exist with respect to Northwest FCS.

also sells loan participations to CoBank. At December 31, 2013, Northwest FCS had sold participation interests to CoBank totaling $1,221,553 and had purchased loan participation

NOTE 14 > Fair Value Measurements

interests from CoBank totaling $719,711.

Accounting guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal

During 2010, Northwest FCS provided a limited recourse collection guaranty to CoBank covering

or most advantageous market for the asset or liability. See Note 2 for additional information.

four participated loans. The remaining balances on the loans were $5,135 and $5,743 as of December 31, 2012 and 2011 respectively. There were no remaining balances on these loans at December 31, 2013. The unfunded commitments balance as of December 31, 2011 was $757. There were no unfunded commitments as of December 31, 2013 or 2012. 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.

Assets and liabilities measured at fair value on a recurring basis at December 31, 2013, 2012, and

The table below represents reconciliations of all Level 3 liabilities measured at fair value on a

2011, for each of the fair value hierarchy values are summarized in the following tables:

recurring basis for the years ended December 31, 2013, 2012, and 2011.

There were no significant transfers between Level 1 and Level 2 during the year. Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2013, 2012, and 2011 for each of the fair value hierarchy values are summarized in the following table:

Valuation Techniques

When the value of the real estate, less estimated costs to sell, is less than the principal balance of

As more fully discussed in Note 2 accounting guidance establishes a fair value hierarchy, which

the loan, a specific reserve is established.

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

Other Property Owned

techniques used by Northwest FCS for assets and liabilities.

The process for measuring the fair value of other property owned involves the use of appraisals or other market-based information. Costs to sell represent transaction costs and are not included as a

Assets Held in Non-Qualified Trusts

component of the assetâ&#x20AC;&#x2122;s fair value. As a result, these fair value measurements fall within Level 3

Assets held in trust funds related to deferred compensation and supplemental retirement plans are

of the hierarchy.

classified within Level 1. The trust funds include investments that are actively traded and have

NOTE 15 > Commitments and Contingencies

quoted net asset values that are observable in the marketplace.

Northwest FCS has various commitments outstanding and contingent liabilities. Derivatives Northwest FCS may participate in financial instruments with off-balance-sheet risk to satisfy the

Exchange-traded derivatives valued using quoted prices would be classified within Level 1 of the

financing needs of its customers and to manage their exposure to interest-rate risk. These financial

valuation hierarchy. However, few classes of derivative contracts are listed on an exchange; thus,

instruments include commitments to extend credit and/or commercial letters of credit. The

the derivative positions are valued using internally developed models that use as their basis readily

instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized

observable market parameters and are classified within Level 2 of the valuation hierarchy. Such

in the financial statements. Commitments to extend credit are agreements to lend to a customer

derivatives include interest rate and foreign currency cash flow hedges.

as long as there is not a violation of any condition established in the contract. Commercial letters of credit are agreements to pay a beneficiary under conditions specified in the letter of credit.

The models used to determine the fair value of derivative assets and liabilities use an income

Commitments and letters of credit generally have fixed expiration dates or other termination

statement approach based on observable market inputs, primarily the LIBOR swap curve and

clauses and may require payment of a fee. At December 31, 2013, $3,730,013 of commitments to

volatility assumptions about future interest rate movements.

extend credit and $23,171 of commercial letters of credit were outstanding.

Standby Letters of Credit

Since many of these commitments are expected to expire without being drawn upon, the total

Standby letters of credit are classified within Level 3. The fair value of letters of credit approximate

commitments do not necessarily represent future cash requirements. However, these credit-related

the fees currently charged for similar agreements or the estimated cost to terminate or otherwise

financial instruments have off-balance-sheet credit risk because their amounts are not reflected on

settle similar obligations.

the balance sheet until funded. The credit risk associated with issuing commitments is substantially the same as that involved in extending loans to borrowers and management applies the same

Loans

credit policies to these commitments. Upon fully funding a commitment, the credit risk amounts

For certain loans evaluated for impairment under FASB impairment guidance, the fair value is

are equal to the contract amounts, assuming that borrowers fail completely to meet their

based upon the underlying collateral since the loans are collateral-dependent for which real estate

obligations and the collateral or other security is of no value. The amount of collateral obtained, if

is the collateral. The fair value measurement process uses appraisals and other market-based

deemed necessary upon extension of credit, is based on managementâ&#x20AC;&#x2122;s credit evaluation of the

information, but in many cases it also requires significant input based on managementâ&#x20AC;&#x2122;s knowledge

borrower.

of and judgment about current market conditions, specific issues relating to the collateral and other matters. As a result, these fair value measurements fall within Level 3 of the hierarchy.

Northwest FCS also participates in standby letters of credit to satisfy the financing needs of its

The next table presents the carrying amounts and estimated fair values of Northwest FCSâ&#x20AC;&#x2122; financial

borrowers. These letters of credit are irrevocable agreements to guarantee payments of specified

instruments at December 31, 2013, 2012, and 2011:

financial obligations. Standby letters of credit are recorded at fair value on the Consolidated Balance Sheet. At December 31, 2013, $80,733 of standby letters of credit were outstanding. The standby letters of credit typically have expiration dates of one year or less. Northwest FCS maintains a contingency reserve for unfunded commitments, which reflects our best estimate of losses inherent in lending commitments made to customers but not yet disbursed upon. The reserve totaled $15,000 at December 31, 2013 and $12,000 at December 31, 2012 and 2011. During 2012 and 2011, Northwest FCS recorded a contingent liability of $1,000 and $2,000, respectively, related to a revenue tax. During 2013, Northwest FCS completed managed audit proceedings with the taxing authority and obtained a resolution of amounts potentially owed for periods open within the statute of limitations. The resolution resulted in Northwest FCS making a net payment of $1,362 to the taxing authority. The reversal of the remaining previously recorded liability of $1,638 is included as a reduction to Other expense in the Consolidated Statement of

A description of the methods and assumptions used to estimate the fair value of each class of

Income.

Northwest FCS' financial instruments for which it is practicable to estimate that value follows:

In addition, actions are pending against Northwest FCS in which claims for monetary damages are

Loans

asserted. Based on current information, management and legal counsel are of the opinion that the

Fair value is estimated by discounting the expected future cash flows using Northwest FCSâ&#x20AC;&#x2122; current

ultimate liability, if any resulting there from, would not be material in relation to the financial

interest rates at which similar loans would be made or repriced to borrowers with similar credit

position and results of operation of Northwest FCS.

risk. As the discount rates are based on Northwest FCSâ&#x20AC;&#x2122; loan origination rates as well as management estimates of credit risk, management has no basis to determine whether the

NOTE 16 > Disclosures about Fair Value of Financial Instruments

estimated fair values presented would be indicative of the assumptions and adjustments that a

Quoted market prices are generally not available for certain System financial instruments, as

purchaser of the loans would seek in an actual sale, which could be less.

described below. Accordingly, fair values are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and

For purposes of determining fair value of accruing loans, the loan portfolio is segregated into pools

other factors. These estimates involve uncertainties and matters of judgment, and therefore

of loans with homogeneous characteristics. Expected future cash flows and interest rates reflecting

cannot be determined with precision. Changes in assumptions could significantly affect the

appropriate credit risk are separately determined for each individual pool.

estimates. 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 value of the underlying collateral. When the net realizable value of collateral exceeds the legal 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

Derivative Assets and Liabilities

fair value. Loans shown in the table above are valued within the fair value Level 3 hierarchy.

The fair value of derivative financial instruments is the estimated amount that Northwest FCS would receive or pay to replace the instruments at the reporting date. The values are provided by

Allowance for Loan Losses

the Bank based on internal market valuation models. The derivative assets and liabilities shown in

As discussed in Note 2, the allowance for loan losses represents an estimate of the credit risk in

the table above is valued within the fair value Level 2 hierarchy.

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

Standby Letters of Credit

is not considered necessary in determining the fair value of Northwest FCS' financial instruments.

The fair value of standby letters of credit is based on fees currently charged for similar

The allowance for loan losses shown in the table above is valued within the fair value Level 3

agreements. The standby letters of credit shown in the table above is valued within the fair value

hierarchy.

Level 3 hierarchy.

Investment in System Entities

NOTE 17 > Derivative Instruments and Hedging Activities

Northwest FCS has investments in other System entities including but not limited to the Bank,

Northwest FCS maintains an overall risk management strategy that incorporates the use of

AgDirect, and FPI as discussed in Note 12. The cost of these investments is considered to

derivative financial instruments to minimize significant unplanned fluctuations in earnings that are

approximate fair value. The investment in System entities shown above is valued within the fair

caused by interest rate volatility. Our goal is to manage interest rate sensitivity by modifying the

value Level 3 hierarchy.

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 currency fluctuations on our foreign currency denominated loan assets. As a result of interest rate

Assets Held in Non-Qualified Benefit Trusts

and foreign exchange rate fluctuations, fixed rate assets and liabilities will appreciate or depreciate

These assets relate to deferred compensation and supplemental retirement plans. As discussed in

in market value. The effect of this variability in earnings is expected to be substantially offset by

Note 14, the fair value of these assets is quoted net asset values. The assets held in non-qualified

gains and losses on the derivative instruments that are linked to these assets and liabilities.

benefit trusts shown in the table above is valued within the fair value Level 1 hierarchy.

Northwest FCS considers the 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

Note Payable to CoBank, ACB

posed by changes in interest rates or foreign exchange rates.

Notes payable are not all regularly traded in the secondary market and those that are traded may not have readily available quoted market prices. Therefore, the fair value of the majority of

By using derivative instruments, Northwest FCS exposes itself to credit risk and market risk.

instruments is estimated by calculating the discounted value of the expected future cash flows. To

Generally, when the fair value of a derivative contract is positive, this indicates that the

the extent that quoted market prices on like instruments are available, the fair value of these

counterparty owes Northwest FCS, thus creating a performance risk for Northwest FCS. When the

instruments is estimated by discounting expected future cash flows based on the quoted market

fair value of the derivative contract is negative, Northwest FCS owes the counterparty and,

price of similar maturity U.S. Treasury notes, assuming a constant estimated yield spread

therefore assumes no performance risk. Northwest FCS’ derivative activities are monitored by the

relationship between Systemwide bonds and notes and comparable U.S. Treasury notes. The note

ALCO as part of the Committee’s oversight of the asset/liability and treasury functions. The

payable to CoBank shown in the table above is valued within the fair value Level 3 hierarchy.

Committee is responsible for approving hedging strategies that are developed within parameters established by Northwest FCS’ Board of Directors. The resulting hedging strategies are then incorporated into Northwest FCS’ overall risk-management strategies.

Northwest FCS has purchased an interest rate cap from CoBank to hedge the potential impact of

NOTE 18 > Quarterly Financial Information (Unaudited)

rising interest rates on our floating-rate debt. If the strike rate of the purchased interest rate cap is

Quarterly results of operations for the years ended December 31, 2013, 2012, and 2011 are as

exceeded, Northwest FCS will receive cash flows on the derivative to hedge our floating-rate

follows:

funding exposure above such strike levels. The interest rate cap is accounted for as a cash-flow hedge. The interest rate cap has a notional amount of $73,000, and was purchased at a trade-date fair value of $1,500. As of December 31, 2013, the interest rate cap fair value was $323 and a corresponding loss of $1,146 was recorded to accumulated other comprehensive loss. During 2013, $31 was reclassified from accumulated other comprehensive loss and recorded as a reduction of net interest income. As of December 31, 2012, the interest rate cap fair value was $129 and the corresponding loss of $1,371 was recorded to accumulated other comprehensive loss. At December 31, 2011, the interest rate cap fair value was $477 and the corresponding loss of $1,023 was recorded to accumulated other comprehensive loss. Northwest FCS also uses foreign exchange forward positions to “lock in” a desired cash flow on foreign currency denominated loans. The specific terms and amounts of the forwards are determined based on the known cash flows on the loans. Each cash flow is hedged via a separate foreign exchange forward sale as it arises. As of December 31, 2013, Northwest FCS recorded a derivative asset of $137 for its executed foreign currency forward contracts, with the corresponding changes in value recorded to accumulated other comprehensive loss adjusted in

Northwest FCS’ 2013 Quarterly Reports to Stockholders are available free of charge by contacting

accordance with accounting guidance on foreign currency translation. The fair value at December

Northwest Farm Credit Services, ACA, P.O. Box 2515, Spokane Washington 99220-2515 or

31, 2012, was a derivative liability of $37 with the corresponding changes in value recorded to

contacting by telephone at (509) 340-5300 or toll free (800) 743-2125 . Northwest FCS’ 2013

accumulated other comprehensive loss adjusted in accordance with accounting guidance on

Quarterly Reports to Stockholders are also available free of charge at any office location or at

foreign currency translation. The fair value at December 31, 2011, was a derivative liability of $293

www.northwestfcs.com. The 2014 Quarterly Reports to Stockholders will be available on

with the corresponding changes in value to accumulated other comprehensive loss adjusted in

approximately May 9, 2014, August 8, 2014, and November 7, 2014. The Northwest FCS 2014

accordance with accounting guidance on foreign currency translation

Annual Report will be posted on www.northwestfcs.com approximately March 14, 2015.

NOTE 19 > Subsequent Events Northwest FCS has evaluated subsequent events through February 28, 2014, which is the date the financial statements were issued or available to be issued and determined there are no other items to disclose.

NORTHWEST FARM CREDIT SERVICES, ACA

Management’s Discussion and Analysis

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 of 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 elected by the board. Two of these board-elected directors are Outside Directors who cannot be customers, stockholders,

The description of significant developments, if any, is incorporated herein by reference to

employees or agents of any Farm Credit institution. One of these outside directors is designated as

“Management’s Discussion and Analysis” of Financial Condition and Results of Operations included

a “financial expert” as defined by FCA Regulation. This director brings independence and financial,

in this annual report.

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 outside perspective and other areas of

Description of Property

expertise to enhance board oversight capabilities. Currently, both outside directors qualify as

Northwest FCS is headquartered in Spokane, Washington. Northwest FCS leases various facilities

financial experts and one acts as an alternate to the designated “financial expert.” The third board-

across the territory it serves, which are described in this annual report.

elected director position is a stockholder and is intended to help assure representation of market segments not currently represented by a stockholder-elected director position or to bring additional

Legal Proceedings

desired skills or background to the board.

Information regarding legal proceedings is incorporated herein by reference to Note 15 of the Consolidated Financial Statements included in this annual report.

Northwest FCS’ board has a comprehensive director training and development program. This training consists of an annual board self-assessment of its governance practices as well as a

Description of Capital Structure

comprehensive new director orientation program. This program is intended to develop an

Information regarding capital structure is incorporated herein by reference to Note 8 of the

understanding of the roles and responsibilities of a director and to familiarize newer board

Consolidated Financial Statements included in this annual report.

members with key areas of financial performance, reporting and board oversight. This training commitment involves an expectation of attendance by all directors at both Farm Credit System and

Description of Liabilities

non-System meetings, seminars and conferences as well as completion of a comprehensive board

Information regarding liabilities is incorporated herein by reference to Notes 5, 7, 10, 11, 15 and

training and leadership program during their term of service. This balance of training assures not

16 of the Consolidated Financial Statements included in this annual report.

only an understanding of the Farm Credit System, but also exposes board members to best practices of other financial and lending institutions and allows them to benchmark Northwest FCS’

Selected Financial Data

operations against those of other successful lending institutions.

“Five Year Summary of Selected Financial Data” included in this annual report is incorporated herein by reference.

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 scheduled meetings each year, plus interim conference calls as needed between meetings. One of

those regularly scheduled meetings is conducted as a comprehensive three-day strategic planning

Audit Committee

session. The board operates with a structure of five committees: Governance, Audit,

This committee is made up of at least four board members, including at least one outside director.

Compensation, Risk and Strategy. These committees are structured to provide focus and expertise

All members of the committee are expected to have practical knowledge of finance and

in key areas of board oversight and to enhance the overall efficiency of scheduled board meetings.

accounting, be able to read and have a working understanding of the financial statements, or

All policies, substantial contracts and other major initiatives are generally reviewed by one of these

develop that understanding within a reasonable period of time after being appointed to the

committees, with any actions recommended to the full board for approval. Each committee

committee. The director designated as the “financial expert” serves as the chair of this committee.

approves a charter outlining the purpose of the committee, its duties, responsibilities, and

Outside director Christy Burmeister-Smith currently serves in this position. The board has

authorities. Generally, these responsibilities are advisory in nature, with the full board acting on

determined that Ms. Burmeister-Smith has the qualifications and experience necessary to serve as

committee recommendations. These charters are reviewed and approved by the full board at least

an audit committee “financial expert,” as defined by FCA regulation, and she has been designated

annually. This committee structure is organized to reflect Northwest FCS’ key financial and

as such. Outside director Julie Shiflett also qualifies as a financial expert and is a designated

operational areas of risk and to enhance the overall effectiveness of the board’s oversight of these

alternate to serve in Ms. Burmeister-Smith’s absence.

areas. These committees generally meet as part of regularly scheduled board meetings and also conduct conference calls as needed.

The Audit Committee has unrestricted access to representatives of the Internal Audit department, independent public accountants and Finance Division. Internal Audit reports directly to this

With the exception of the Governance and Compensation Committees, committee members are

committee.

identified by the board Chair in consultation with the Vice Chair and CEO. The Chair and Vice Chair of each committee are elected by committee members. In the case of the Governance Committee,

This committee assists the board in fulfilling its oversight responsibility related to accounting

committee members as well as the Chair and Vice Chair are set by policy as outlined below. In the

policies, internal controls, financial reporting practices and regulatory requirements. This

case of the Compensation Committee, the CEO does not participate in identifying its members or

committee has a charter detailing its purpose and key objectives, authority, composition, meeting

its Chair and Vice Chair. Compensation Committee members and the Chair and Vice Chair of this

requirements and responsibilities. The charter, among other things, gives the committee the

committee are identified by the board Chair in consultation with the Vice Chair and at least one

authority to hire and compensate the external auditor, approve all audit and permitted non-audit

outside director. Following are full descriptions of the committees:

services, review the audited financial statements and all public financial disclosures, meet privately with internal and external auditors and review any complaints regarding accounting irregularities

Governance Committee

and fraud. The charter is posted on Northwest FCS’ website www.northwestfcs.com.

This committee is made up of the Chair and Vice Chair of the board as well as the Chair of the Compensation, Audit, Risk and Strategy Committees. The board Chair and Vice Chair act as the

Compensation Committee

Chair and Vice Chair of this committee. The Governance Committee has the authority to review,

This committee consists of the board Chair and Vice Chair, at least one outside director, and five

prioritize and recommend agenda items for board meetings and is responsible for all board policies

other board members selected by the board Chair in consultation with the Vice Chair and an

not assigned to other committees. Committee duties also include serving as an ad hoc committee

outside director. Neither the CEO nor any member of management can be involved in the selection

on major System and organizational issues as well as System legislative and regulatory affairs. This

of committee members nor can they participate in any deliberations of the committee on matters

committee also oversees the director nomination and board election processes, director training,

relating to their own compensation.

standards of conduct and serves as a Search Committee for appointed director positions and CEO transition, if needed.

The committee is responsible for reviewing and recommending for full board approval the 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 compensation,

benefits and perquisites under the terms of the CEO’s compensation plan. This committee is also

internal strengths and weaknesses and external factors such as economic, competitor and political

responsible for recommending to the board the terms of the senior officers’ compensation plan and

trends. The committee’s authority is generally limited to investigation, development of proposed

participation of senior officers in that plan. The board has delegated to the CEO the responsibility

positions, and making recommendations to the full board for approval when appropriate.

to administer the compensation of those senior officers within board approved guidelines. However, the CEO must review the compensation levels for each senior officer with the

Northwest FCS Directors

Compensation Committee before it becomes effective. The committee also reviews and

The following represents information regarding the directors of Northwest FCS, including their

recommends for board approval any short- or long-term incentives to be awarded to senior officers

principal occupations, business experience and any business in which they serve on the board of

under the terms of their compensation plan. The committee is also responsible for director

directors or as a senior officer. All directors are elected to serve five year terms and are limited to

compensation and for oversight of Northwest FCS’ employee salary structure, benefit plans, all

serving three full terms. Unless otherwise noted, the principal occupation, business experience and

board policies applicable to those plans and other human resource matters not specifically

employment of the directors over at least the past five years is related to their farming, ranching

assigned to other committees.

or aquatics operations described below.

Risk Committee

Rick Barnes – Callahan, California

This committee provides oversight for the majority of the enterprise risk management practices of

Elected in 2010; term expires 2015. Member of Risk (Chair), Strategy and Governance

the association. This committee reviews credit portfolio policies and management reports that

Committees.

monitor compliance with these policies. It also acts on behalf of the board on certain delegated

Principal Occupation/Experience: Owner/Operator, Limerock Ranch, a cow-calf operation with

credit related matters. The committee reviews and recommends to the full board for approval

some timber. Also produces grass hay for the horse market.

underwriting standards and portfolio and lending limit policies which guide all of Northwest FCS’

Other Affiliations: Director, Siskiyou Resource Conservation District and Life-Member of the Cal

lending and credit related activities. In addition to monitoring the overall credit characteristics of

Aggie Alumni Association.

the industries Northwest FCS serves and the existing portfolio, the committee also reviews and recommends to the full board for approval certain credit related actions that exceed management’s

Christy Burmeister-Smith – Newman Lake, Washington

delegated authority. This committee also oversees key risk areas associated with budget,

Board-Elected Outside Director

operations, technology, funding, interest rate, liquidity, capital management as well as those risks

Elected in 2010; term expires 2015. Serves as the designated “financial expert’ on the Northwest

associated with its alliance partners and counterparties.

FCS board. Member of Audit (Chair), Compensation and Governance Committees. Principal Occupation/Experience: Vice President-Controller and Principal Accounting Officer at Avista Corporation, a provider of energy services.

Strategy Committee

Other Affiliations: Director, Avista Foundation, a community investment program providing

This committee provides oversight in developing and monitoring the association’s strategic and

funding to non-profit organizations; Director, YWCA of Spokane, a social services provider.

business plans in accordance with Northwest FCS’ mission, policies and procedures. It is responsible to ensure board planning sessions and the association’s overall strategic planning processes serve as foundations for the business plan. This specifically includes evaluating potential

Drew Eggers – Meridian, Idaho

benefits, costs, risks and strategies for considering opportunities such as emerging technologies,

Elected in 2001; term expires 2014. Member of Audit (Vice Chair) and Strategy Committees. Principal Occupation/Experience: Owner/operator, Drew Eggers Farms. Raises peppermint,

product development, joint ventures, strategic alliances, mergers and acquisitions. The committee

spearmint, winter wheat and silage corn.

oversees marketing, advertising, community support and state legislative activities. It provides

Other Affiliations: Previously served as Chairman, Leadership Idaho Agriculture Foundation.

oversight of the Local Advisor program, Crop Insurance, Business Management Center and Knowledge Center. The committee also evaluates management’s assessment of the association’s

Jim Farmer – Nyssa, Oregon

Principal Occupation/Experience: President and Manager, Karag, Inc., a family-held

Elected in 2010; term expires 2015. Member of Audit and Compensation Committees.

corporation producing wheat, malting barley and other crops on a 4,300 acre farm in the joint

Principal Occupation/Experience: President and co-owner of Fort Boise Produce, a family

venture 1927 Homestead. Barley production consultant with Heineken International.

held corporation that packs and markets fresh onions. Secretary and co-owner of Deseret Farms, a

Other Affiliations: Board Member, The Farm Credit Council, a Farm Credit System trade

family held corporation that produces onions, wheat, field corn and dry edible beans for seed. Co-

association handling legislative and regulatory matters.

owner of farmland and other real estate with brother, Warren Farmer.

Bruce Nelson – Spokane, Washington

Other Affiliations: Secretary/Treasurer and Director, Nyssa Rural Fire Protection District.

Elected in 1999; term expires 2014. Member of Compensation and Risk Committees.

Mark Gehring – Salem, Oregon

Principal Occupation/Experience: Owner/Manager, Nelson Farms, Inc., Silver Creek Farms,

Elected in 2010; term expires 2015. Member of Strategy (Vice Chair) and Audit Committees.

Inc., and Twin Buttes Farms, Inc., raising several varieties of wheat, peas, lentils, barley and

Principal Occupation/Experience: Owner/operator, Gehring Farms; Managing Member, Gibson

nursery trees.

Creek Farms, LLC. Raises Marionberries, blackberries, radish seed, wheat and turf grass seed.

Other Affiliations: Director, Washington’s Nature Conservancy Board; Director, Second Harvest

Other Affiliations: Co-founder and past chairman of the board of RS Growers, Inc. and

Food Bank; Ag Advisory Board Member for Congresswoman Cathy McMorris Rodgers.

RainSweet, Inc., a Salem, OR fruit and vegetable processor.

Dave Nisbet – Bay Center, Washington David Hedlin – Mt. Vernon, Washington

Board-elected stockholder director

Elected in 2006; term expires 2016. Serves as Vice Chair of the board of directors. Member of

Elected in 2007; term expires 2017. Member of Risk (Vice Chair) and Strategy Committees.

Governance (Vice Chair), Audit and Compensation Committees.

Principal Occupation/Experience: Owner, Nisbet Oyster Co., Inc.; President and CEO, Goose

Principal Occupation/Experience: Owner/Partner, R C Koudal Land Co. Raises vegetable seed,

Point Oysters, Inc., and Hawaiian Shellfish, LLC. Operates a shellfish processing plant, hatchery

pickling cucumbers, pumpkins and wheat.

and grows Pacific oysters.

Other Affiliations: Board Member, Northwest Ag Research Foundation, Skagitonians to Preserve

Other Affiliations: Director, Pacific Shellfish Institute; Industry Advisory Board Member, Oregon

Farmland, and Skagit Valley Culinary Arts; Commissioner, Skagit County Dike District #9.

State University Coastal Oregon Marine Experiment Station (COMES).

John Helle - Dillon, Montana

Kevin Riel – Yakima, Washington

Elected in 2012; term expires 2017. Member of Strategy (Chair), Audit and Governance

Elected in 2007; term expires 2017. Member of Risk and Strategy Committees.

Committees.

Principal Occupation/Experience: President, Double R Hop Ranches, Inc., President, Trigen

Principal Occupation/Experience: Owner, Helle Livestock, a commercial and purebred sheep

Enterprises, Inc., Managing Partner, WLJ Investments LLC, and 4K Investments, LLC. Farming

operation. Partner in Rebish and Helle and Village Vista, LLC, land management and farms small

operations raising hops, apples and Concord grapes.

grains and hay. Part owner in Duckworth, LLC, a vertically integrated apparel company taking wool

Other Affiliations: Director, Hop Growers of America.

from sheep to shelf.

Karen Schott – Broadview, Montana

Other Affiliations: None.

Elected in 2006; term expires 2016. Serves as Chair of the board of directors. Member of

Herb Karst – Sunburst, Montana

Governance (Chair) and Compensation Committees.

Elected in 2008; term expires 2018. Member of Compensation and Risk Committees.

Principal Occupation/Experience: Owner/Secretary, Bar Four F Ranch, Inc. Raises winter wheat, spring wheat, safflowers, and peas.

Other Affiliations: Advisory Board Member, Southern Montana Experiment Station; President,

additional 10 percent, and reflects their unique responsibilities and significant additional time

Broadview Community Center Board; Treasurer, Stillwater County 4-H Leaders Council.

demands of these three positions. Director compensation paid annually to all directors was increased by $976 ($1,073 in the case of the Chair of the board and the Chairs of the Audit and

Julie Shiflett – Spokane, Washington

Compensation Committees). Each director receives a monthly retainer of $4,148 and the board

Board-Elected Outside Director

Chair and Chairs of the Audit and Compensation Committees receive a monthly retainer of $4,563.

Elected in 2008; term expires 2018. Serves as the alternate to the designated “financial expert” on

No additional per diem is paid for attendance at Northwest FCS’ meetings or functions. If a director

Northwest FCS’ board. Member of Compensation (Chair), Governance and Risk Committees.

is not able to attend a regular monthly board meeting, then the director only receives the monthly

Principal Occupation/Experience: Executive Vice President and Chief Financial Officer, Red

retainer if attendance at or performance of other official business during that month warrant that

Lion Hotels; founding partner of Northwest CFO, which assists emerging and mid-market

payment. In addition, Northwest FCS purchases an Accidental Death and Disability policy for each

companies to increase cash flow, profitability, sales, and company value; past CFO for Signature

director.

Genomic Laboratories and Columbia Paint and Coatings. Other Affiliations: Director and Audit Committee Chair, American Chemet Corporation, a powder

Directors and senior officers are reimbursed for reasonable travel expenses and related expenses

based chemicals manufacturer. Past Chair of Deaconess Medical Center Board of Trustees.

while conducting association business. In addition, directors are allowed reimbursement for expenses related to their spouse attending the Annual Stockholder and Local Advisors Meeting,

Shawn Walters – Newdale, Idaho

summer planning session, the December board meeting and one national meeting each year.

Board Elected in 2010 to fill remaining term of vacated director position. Elected in 2011; term

Directors’ spouse travel expenses may also be reimbursed for the legislative fly-in, if the spouse

expires 2016. Member of Compensation (Vice Chair) and Audit Committees.

participates in Congressional visits. In all other cases, spouse expenses are reimbursed only if

Principal Occupation/Experience: Owner, Shawn Walters Farms, Inc.; Co-Owner, Walters

attendance at a meeting is preapproved by the board. The aggregate amount of expenses

Produce, Inc.; Partner in Walters & Walters, Aristocrat Farms, Idaho Grain Producers, Walters

reimbursed to directors in 2013 was $116,238 compared to $106,789 in 2012 and $137,382 in

Osgood Farms, LLC, and Walters Family Limited Partnership. Operates a fresh pack potato facility,

2011. The Director Compensation policy is available and will be disclosed to stockholders upon

grows potatoes, wheat, barley, alfalfa and canola seed. Member of Growmark, a cooperative

request.

providing potato marketing. Other Affiliations: Director, Enterprise Canal; Director, Idaho Business Council. Compensation of Directors Director compensation is under the oversight of the board’s Compensation Committee. The 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 Chair or other key board positions. Absent such a study, board policy limits any adjustment to director compensation to the cost of living index published each year by FCA. Increases to director compensation typically become effective May 1 of each year. Director compensation in May 2013 was set at a rate of $49,774 per year. The board Chair and Chairs of both the Audit and Compensation Committees are paid $54,751. This represents an

Information for each director for the year ended December 31, 2013, is as follows:

Jim Allen, Senior Vice President-Capital Markets Mr. Allen has served as Senior Vice President-Capital Markets since the unitâ&#x20AC;&#x2122;s inception in 1995. Prior to that, he held various positions for Northwest FCS since being hired in 1978. Fred DePell, Executive Vice President-Financial Services Mr. DePell has served as Executive Vice President-Financial Services since 1992. Prior to that, he held various positions for Northwest FCS since being hired in 1978. Mr. DePell serves on the board of directors of the YMCA of the Inland Northwest headquartered in Spokane, Washington. The YMCA is part of the largest not-for-profit community service organizations in America, working to meet the health and social service needs of men, women and children. Brent Fetsch, Senior Vice President-Chief Strategy Officer and Chief Information Officer Mr. Fetsch has served as Senior Vice President-Chief Strategy Officer and Chief Information Officer since January 2011. Prior to that, he was Senior Vice President-Community Lending and also held various positions for Northwest FCS since being hired in 1987. Mr. Fetsch serves on the board of

Senior Officers

directors of Spokane County United Way and chairs its administrative and finance committee.

Listed below are the CEO and eight senior officers of Northwest FCS who served during 2013.

Spokane County United Way works with nonprofits, government, businesses and community

These senior officers reported to the CEO and were on the Management Executive Committee

partners to provide support to those in need.

(MEC) of Northwest FCS. Information is provided on the experience of these senior officers, as well as on any business for which they serve on the board of directors or act as a senior officer and the

Stacy Lavin, General Counsel

primary business of that organization.

Mr. Lavin has served as General Counsel since May 2011. Prior to that, he was Assistant General Counsel. Mr. Lavin has worked for Northwest FCS since 2001.

Phil DiPofi, President and CEO Mr. DiPofi has served as President and CEO since January 1, 2011. Prior to that, he held various

Tom Nakano, Executive Vice President-Chief Financial Officer

senior officer positions with CoBank. Mr. DiPofi currently serves on the board of Financial Partners,

Mr. Nakano has served as Executive Vice President-Chief Financial Officer since October 2004. He

Inc. (FPI) which provides technology support for Farm Credit institutions, including Northwest FCS.

was recently named Executive Vice President-Chief Administrative and Financial Officer effective

He also serves on the board of Second Harvest Food Bank in Spokane, Washington. Second

January 1, 2014. Prior to 2004, he was Vice President-Loan Accounting and Operations and held

Harvest leads a network of 250 neighborhood food banks and meal centers throughout Eastern

various positions for Northwest FCS since being hired in 1993. Mr. Nakano serves on the Farm

Washington and North Idaho. During 2013 Mr. DiPofi served on the board of directors of Greater

Credit Foundations Consolidated Benefit Trust Committee. This committee oversees the fiduciary

Spokane Incorporated, a regional chamber of commerce and economic development organization.

and plan administrative responsibilities of the medical and welfare benefit plans offered by a number of Farm Credit employers, including Northwest FCS. He also serves as a board member of the Oregon State University Alumni Association which engages alumni and friends to promote the advancement of the university and build alumni membership, programs and value-added services.

Mark Nonnenmacher, Executive Vice President-Agribusiness

To demonstrate our commitment to align compensation with strong governance practices that are

Mr. Nonnenmacher has served as Executive Vice President-Agribusiness since April, 2012. Mr.

in our stockholders’ interests, the goal of the Compensation Committee (Committee) is to ensure:

Nonnenmacher has over 26 years of experience in the System, most recently at CoBank managing the agribusiness lending operations of their Western Region. He serves as a director on the University of Montana - College of Forestry Advisory Board. This board provides input to the Dean for program composition, as well as outreach and communication. Mr. Nonnenmacher also serves on the Idaho Cooperative Council Board, providing industry awareness, education and political involvement in support of Idaho cooperatives.



A strong linkage between pay and performance of the organization,



Multiple-year measurements are used to reward for sustained performance,



Competitive compensation through market data review,



The overall compensation program design, including incentive plans, does not encourage excessive risk taking, and

Kathy Payne, Executive Vice President-Human Resources and Corporate



Administration

Best governance practices are followed.

Ms. Payne has served as Executive Vice President-Human Resources and Corporate Administration

Compensation Philosophy and Objectives

since July 2011. Prior to that she served as Executive Vice President-Human Resources and

Our compensation program is intended to:

Marketing, in a lead position in the Human Resources department since 1992 and in various other positions since being hired in 1988. Ms. Payne serves on the board of directors of Farm Credit



Support a strong and enduring cooperative enterprise,

Foundations and the Plan Sponsor Committee which oversees the plan design and non-fiduciary



Successfully execute our mission,



Reinforce a high-performance culture through pay for performance,



Attract and retain talented staff needed to achieve our mission, and



Provide competitive total compensation opportunities that balance current rewards with long-

responsibilities associated with the benefit plans offered by a number of Farm Credit employers, including Northwest FCS. John Phelan, Executive Vice President-Chief Risk Officer Mr. Phelan has served as Executive Vice President and Chief Risk Officer since January 2011. Prior

term opportunities, and provide security contingent upon performance.

to that, he was Senior Vice President-Commercial Lending and held various positions with Northwest FCS since being hired in 1992.

Linking Pay and Performance Our framework for compensation is designed to pay for performance. To achieve competitive

Compensation of CEO and Senior Officers

compensation levels, our management must achieve strong results across multiple measures of performance. As a result, a large percentage of compensation is “at risk” – if Northwest FCS results

Executive Compensation - Summary

are below our plan, compensation paid will be less than competitive levels. The at-risk component

Our compensation program for the President and CEO (CEO) and Senior Officers of Northwest FCS

of compensation is provided through short- and long-term incentives while the “fixed” portion is

is designed to reward management for performance that builds long-term value for our

salary and benefits, as explained below.

stockholders, fulfills our mission, ensures safety and soundness of our organization and enhances the value of our cooperative. We accomplish this by tying a significant portion of compensation for our leadership team to balanced scorecards of performance measures that are consistent with our strategy and mission.

Program Design

The following table summarizes the scorecards for each plan:

Our compensation program for the CEO and Senior Officers has four components: Component

Salary

Pay a competitive salary to reward for experience, skills and performance.

20%

Return on Equity

Provide a competitive basis for other rewards based on salary.

20%

Adverse Assets/Risk Funds

10%

Efficiency Ratio

20%

Strategic Business Objectives

15%

After-tax Net Income

15%

Return on Equity

25%

Adverse Assets/Risk Funds

20%

Core Capital

25%

Strategic Business Objectives

Purpose

Reward for accomplishing annual Northwest FCS’ goals that over time result

Incentive Plan

in long-term success. Reward for profitability, return on stockholder equity,

(STIP)

loan quality, expense control, and achieving strategic goals. Reward for

LTIP

individual employee contributions.

Long-Term

Reward for sustained performance, safety and soundness of Northwest FCS.

Incentive Plan

Reward for achieving multiple-year Northwest FCS’ goals for profitability,

(LTIP)

return on stockholder equity, loan quality, capital adequacy and achieving

Performance Period

Annual

Multiple-Year

At the beginning of each performance period, the Committee approves financial targets and goals

strategic goals. Retain top performers based on performance.

for each category, including minimum levels of performance required in order for an award to be earned in each category, and maximum levels of performance on which incentive will be paid. The

Provide financial security and convenience for our employees through a

approved financial targets and goals are aligned with the organization’s business plan financial

competitive benefits program and limited perquisites; considered “indirect”

metrics to ensure Senior Officer incentives match business plan objectives. In addition, a minimum

compensation.

Total

Measure/Goal After-tax Net Income

Short-Term

Benefits

Weight 30%

Component

STIP

Return on Assets threshold must be achieved before any incentives are earned. The Committee has discretion to adjust awards or performance assessments as needed to ensure

Each component and the total compensation package is managed to be

rewards appropriately represent our pay for performance philosophy.

competitive and ensure a linkage to performance.

In addition to the measures and goals listed above, the adjustments to base salary and STIP

Performance Assessment

awards are impacted by the individual performance of the participant. As a part of the Northwest

A framework of multiple performance metrics and goals and individual performance assessment

FCS’ performance management process, all employees are provided performance reviews and in

reinforces our pay for performance philosophy. This framework balances annual and multiple-year

the case of the CEO, the performance review is conducted by the Committee with input and

performance measures. The STIP is based upon multiple measures of performance, including an

approval by the Board of Directors.

individual performance factor. The LTIP is based on various performance measures over multiple years of organizational results.

2013 Compensation Decisions All Senior Officers appointed to serve on the Management Executive Committee (MEC) participate in the STIP and LTIP. The target awards for the STIP range from 15 percent to 60 percent of salary and the actual STIP awards may range from 0 percent to approximately two times the target award, depending upon Northwest FCS’ performance and individual performance. STIP

awards are paid in the year following the performance period, after the Committee approves

Encouraging Appropriate Risk Taking

achievement of financial targetsand goals. Target awards for the LTIP range from 20 percent to 60

Our compensation program is structured to provide a balance of components that are based upon

percent of salary with a range of opportunity from 0 percent up to two times the target award.

multiple financial and non-financial measures of performance. It is designed to encourage the appropriate level of risk-taking, consistent with maintaining safety and soundness and

An LTIP was implemented in 2012 with a plan that is based upon 2012-2013 performance. In

measurements aligned with our business strategy and mission. The Committee has taken the

addition, to facilitate the transition from the prior LTIP to the new LTIP, a one-year “stub plan”

following measures to ensure our compensation program does not encourage inappropriate risk

was implemented based upon 2012 performance. LTIP awards for the 2012 “stub plan” were paid

taking:

in 2013 based upon the 2012 performance period. The 2012-2013 LTIP awards will be paid in 2014 and disclosed in the Senior Officer Compensation table to reflect performance for 2012-2013. In the future, awards will be based upon multiple years of performance, and current plans include the 2013-2014 “Stub” LTIP and 2013-2015 LTIP.



Implemented caps on incentive plans,



Balanced incentive compensation through a STIP and LTIP,



Designed our incentive plans to provide rewards based upon multiple financial and nonfinancial measures and goals,

The measures used in incentive compensation are what we believe to be the key drivers of Northwest FCS’ long-term success and are directly correlated to the pay received by Senior



Officers. Components of Senior Officer compensation increased or decreased in 2013 based on the

Incorporated individual performance into the STIP based upon our performance management system,

level of achievement of these goals, which are tied to Northwest FCS’ mission and strategy. 

Engaged an independent consultant to conduct a risk review of our compensation and benefit programs,

To calculate incentive awards, Northwest FCS aggregates the performance under each plan and calculates a separate Corporate Performance Factor for the STIP and LTIP. For the STIP, individual



performance is assessed (see Performance Assessment above) and used to determine an

Approved performance targets and ranges for STIP and LTIP metrics that align with our business plan, strategy and mission, and

Individual Performance Factor used in the incentive award calculation.  Actual awards under the STIP and LTIP for the CEO and Senior Officers were determined as

Retained discretion to adjust awards as needed.

Compensation Governance Process and Decisions

follows:

The Committee is composed of members of our Board of Directors and recommends CEO compensation decisions to the Board. In carrying out its responsibilities, the Committee regularly reports to and consults with the Board and, when appropriate, discusses compensation matters with the CEO. The Committee reviews pay and performance matters throughout the year with the assistance of management and its independent consultant. The Committee’s process includes:

Actual STIP and LTIP awards earned for the President and CEO and other Senior Officers are presented in the Summary Compensation Table below.



Selecting and approving performance measures for the STIP and LTIP balanced scorecards,



Reviewing mid-year performance results and accruals of STIP and LTIP awards,



Reviewing corporate performance against approved goals and determining final achievement,



Assessing CEO performance and reviewing Senior Officer performance assessments conducted by the CEO,



Determining and approving each component of CEO compensation for the next fiscal year

The “Short-term Incentive Compensation” shown in the table below reflects the STIP earned by

using market comparisons and performance assessments,

the CEO in each year. The “Long-term Incentive Compensation” shown for 2011 reflects the LTIP award earned by the CEO together with any gains or losses incurred on these funds while held in

Approving actual awards under incentive programs for the CEO based upon performance

Trust. The 2012 LTIP represents the “stub plan” award for achievement of performance goals

assessments, 



during 2012 and 2013 represents the 2012-2013 two-year “stub” LTIP award for achievement of

Approving overall compensation plans and any design changes to compensation programs for

performance goals during 2012-2013. In the future, awards will be based upon multiple years of

the annual compensation period,

performance, and current plans include the 2013-2014 LTIP and 2013-2015 LTIP.

Reviewing and approving programs that provide benefits or potential benefits to management

Because the President and CEO was not able to participate in Northwest FCS’ Defined Benefit

such as employment agreements, severance benefits and other benefit programs, and 

Pension Plan, in addition to his compensation outlined above, Northwest FCS makes an annual

An annual assessment of the risk of programs to ensure the operation of the programs does

contribution to his Non-Qualified Defined Contribution Plan. The amount is equal to the lesser of

not create a material adverse risk to the organization.

$200,000 or 15 percent of the total of his base salary and short-term incentive award each year. It is reported under “Deferred and Perquisites” in the table below. The amounts earned related to

In conducting its responsibilities as determined by the Board, the Committee has reviewed and

this award were $161,561, $145,092 and $120,000 for the years ended December 31, 2013, 2012

concluded that:

and 2011, respectively.



Long-term compensation and retirement benefit obligations are appropriate for the

As of December 31, 2013, the President and CEO is employed pursuant to an employment

participants in the plans and their roles and responsibilities, 



agreement, which provides specified compensation and related benefits in the event his

Incentive programs are not unreasonable or disproportionate to the services provided by

employment is terminated, except for termination for cause. In the event of termination except for

Senior Officers and other employees of Northwest FCS, and

cause, the employment agreement provides for (a) payment of his prorated salary and incentives and (b) payment of three times his base compensation. The employment agreement also provides

Levels and design of Senior Officer total compensation align with Northwest FCS’ strategy.

certain limited payments upon death or disability. To receive payments and other benefits under the agreement, the President and CEO must sign a release agreement to give up any claims,

CEO Compensation

actions or lawsuits against Northwest FCS that relate to his employment with Northwest FCS. The

The Committee reviews the CEO’s total compensation based on the CEO’s performance, Northwest

agreement also provides for non-solicitation by the President and CEO for 24 months following

FCS’ performance and market considerations prepared by the independent consultant. Market

termination of employment.

considerations include compensation for CEOs of comparable financial institutions, including other Farm Credit System entities, approved by the Committee annually. The CEO participates in the

Senior Officer Compensation

STIP and LTIP programs provided for Senior Officers of Northwest FCS, in addition to receiving salary and benefits. The CEO’s STIP potential in 2013 was a target of 60 percent to be awarded for

Senior Officers participate in the STIP and LTIP in addition to receiving base salary and benefits

meeting these pre-established goals described above, with the opportunity to earn up to

generally provided to management personnel. The Committee reviews the Senior Officers’ total

approximately two times for exceeding those goals. The CEO’s LTIP award potential was a target

compensation based on their individual performance assessments provided by the CEO, Northwest

of 60 percent to be awarded for meeting pre-established goals, with a maximum award of two

FCS’ performance and market considerations prepared by the independent consultant using the

times for exceeding the goals.

same comparable financial institutions as used for the CEO’s compensation. The STIP and LTIP provide Senior Officers the opportunity to earn awards as a percent of their base salaries for meeting pre-established performance goals. For 2013, STIP targets ranged from 15 percent to 35 percent, with the potential to earn a maximum of 30 percent to approximately 70 percent for

exceeding those goals, and LTIP targets ranged from 20 percent to 40 percent, with the potential

“Deferred Award” shown reflects the long-term awards in the year they were earned, together with

to earn a maximum of 40 percent to 80 percent for exceeding those goals.

any gains or losses incurred, where applicable, on those awards that were held in trust. The first

As of December 31, 2013, the Senior Officers are provided specified severance and other benefits

established goals for 2012 when this plan was implemented to facilitate the transition from the

in the event their employment is terminated, except for termination for cause. In the event of

prior LTIP to the new LTIP.

award from the new LTIP represents the one year “stub plan” award for performance against pre-

termination, except for cause, a Senior Officer is entitled to a lump sum severance payment equal to one times base compensation. To receive the severance payment, the Senior Officer must sign a release agreement to give up any claims, actions or lawsuits against Northwest FCS that relate to their employment with Northwest FCS. The agreement also provides for non-solicitation by the Senior Officer for 24 months following termination of employment. Summary Compensation Table On October 3, 2012, the FCA adopted a regulation that requires all System institutions to hold nonbinding advisory votes on the compensation for all Senior Officers and/or the CEO when the compensation of either the CEO or the Senior Officer group increases by 15 percent or more from

(1) Represents the STIP previously described for 2013 and 2012 which is paid in the first quarter

the previous reporting period. In addition, the regulation requires associations to hold a non-

of the year subsequent to the reported year to persons who continue to be employed by

binding advisory vote on CEO and/or Senior Officer compensation when 5 percent of the voting

Northwest FCS or unless otherwise provided for. The 2012 year includes a signing bonus for an

stockholders petition for the vote and to disclose the petition authority in the annual report to

executive hired within that year. For 2011 these balances include prior short-term incentive plans

shareholders. The regulation became effective December 17, 2012, and the base year for

in place during that year.

determining whether there is a 15 percent or greater increase was 2013. No association has held an advisory vote based on a stockholder petition in 2013.

(2) Represents the LTIP described previously for the 2012-2013 stub year (presented within 2013) and the 2012 stub year (presented in 2012). In addition in 2011, the amounts include awards

On January 17, 2014, the President of the United States signed into law the Consolidated

granted in that year for a previously existing plan. The 2011 awards will be paid in early 2015 as

Appropriations Act which includes language prohibiting the FCA from using any funds available to

the previously existing plan requires a delay in the payment of the award. During the years ended,

“to implement or enforce” the regulation. In addition, on February 7, 2014, the President of the

2013, 2012, and 2011, plan balances which became vested related to this plan by senior officers

United States signed into law the Agricultural Act of 2014. The law directs the FCA to within 60

totaled $178,894, $185,066 and $179,550 for awards granted in 2010, 2009, and 2008,

days of enactment of the law “review its rules to reflect the Congressional intent that a primary

respectively. The market value adjustments on the balances while held in trust are included in

responsibility of boards of directors of Farm Credit System institutions, as elected representatives

each respective year the balances were held in trust. The information presented for 2012 and 2011

of their stockholders, is to oversee compensation practices.” The FCA has not yet taken any action

also includes payments to certain Senior Officers for a separate prior plan.

with respect to their regulation in response to these actions. (3) Various deferred or perquisite amounts including, but not limited to, the CEO Non-Qualified The compensation shown in the table below is the actual compensation earned by the CEO and

Defined Contribution Plan discussed previously, other non-qualified contributions made by

Senior Officers during the years ended December 31, 2013, 2012, and 2011. The short-term

Northwest FCS, vacation adjustments, and vehicle allowances.

incentive compensation shown reflects the short-term incentive earned in each year, which is paid in the following year, once final year-end financial performance has been determined. The

(4) Represents 401(k) employer contributions, other compensation of minimal value for all senior

The Defined Benefit Pension Restoration Plan (Restoration Plan) provides eligible employees

officers and the change in pension value for one Senior Officer.

benefits which were limited by IRC Sections 401(a) (17), 415 or any Code provision or government regulations subsequently issued, and therefore are not available under the Pension Plan. The

(5) There were no individuals outside of the Senior Officers during the years noted which required

monthly benefit is equal to the difference between the participant’s actual monthly retirement

disclosure.

benefit payment under the Pension Plan and the monthly retirement benefit payment that would be payable to the participant under the Pension Plan if the limitations of IRC. 401(a) (17), 415, or

Total compensation paid during the last fiscal year to any Senior Officer, or to any other employee

any code provision or government regulations subsequently issued, did not apply. The Restoration

included in the aggregate, is available and will be disclosed to stockholders upon request. Senior

Plan valuation was determined using an assumption that benefits will be distributed as a lump sum

Officers are reimbursed for travel expenses and related expenses while conducting business for

at the participants’ earliest unreduced retirement age.

Northwest FCS and the travel policy is available and will be disclosed to stockholders upon request. Shareholders may petition for a non-binding advisory vote on the CEO and Senior Officer

Transactions with Senior Officers and Directors

compensation. When 5 percent of the voting shareholders petition for a vote on Senior Officer

Information regarding related party transactions is incorporated herein by reference from Note 12

compensation, a non-binding advisory vote must be held.

to the Consolidated Financial Statements included in this annual report.

The table below provides certain pension information by plan for the only Senior Officer

Involvement in Certain Legal Proceedings

participating in the plans. There were no individuals outside of the Senior Officer during the years

There were no events during the past five years that are material to evaluating the ability or

noted which required disclosure and the CEO is not a participant in these plans.

integrity of any person who served as a director or Senior Officer on January 1, 2014, or at any time during 2013.

Relationship with Independent Public Auditors There were no changes in independent public auditors since the prior annual report to stockholders. In addition to audit services, the independent public auditors, PricewaterhouseCoopers LLP, performed non-audit services for a fee of approximately $9,000 in 2013 and tax services for a fee of approximately $23,000 in 2011. The non-audit services were

The actuarial present values of accumulated benefits for plans noted within the table are funded

approved by the audit committee. There were no similar fees incurred during 2012. There were no

by Northwest FCS.

material disagreements with the independent public accountants on any matter of accounting principles or financial statement disclosure during this period.

The Defined Benefit Pension Plan (Pension Plan) provides participants with various options at normal retirement (age 65). Participants may elect to receive a normal retirement benefit upon

Audit Fees and Expenses

retirement or otherwise terminate their employment and satisfy certain conditions. A normal

Fees and expenses incurred by Northwest FCS for audit services rendered by its independent

retirement benefit is based on, but not limited to, the highest consecutive 60 months’ salary and

public auditors, PricewaterhouseCoopers LLP, were approximately $393,000 at December 31, 2013

the participant’s total years of service in the plan (maximum of 35 years). Participants may elect to

and $368,500 at December 31, 2012 and 2011 respectively. These fees and expenses were

receive their accrued vested pension benefits as an annuity or as a single lump sum distribution. A

incurred for the annual financial statement audit, including the audit of internal controls over

lump sum distribution includes the present value of a single life annuity based on mortality and

financial reporting as of December 31, 2013, 2012, and 2011.

interest rate assumptions defined in the Pension Plan. The Pension Plan provides benefits up to the applicable limits under Internal Revenue Code (IRC) Sections 401(a) (17) and 415.

Consolidated Financial Statements The Consolidated Financial Statements, together with the Report of Independent Auditors dated February 28, 2014, and the Report of Management appearing in this annual report, are incorporated herein by reference.

Relationship with CoBank, ACB Northwest FCS’ statutory obligation to borrow from CoBank, ACB is discussed in Note 7 of the Consolidated Financial Statements. 

CoBank, ACB’s ability to access the capital of Northwest FCS is discussed in Note 4 of the Consolidated Financial Statements.



The major terms of any capital preservation, loss sharing or financial assistance agreements between Northwest FCS and CoBank, ACB are discussed in Notes 2 and 8 of the Consolidated Financial Statements



A discussion of how the financial condition and results of operations of CoBank, ACB may materially affect a stockholder investment in Northwest FCS and Northwest FCS’ investment in CoBank, ACB is discussed in Note 1 of the Consolidated Financial Statements.



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 strict confidence. Federal regulations allow disclosure of such information by Northwest FCS only in certain situations.

NORTHWEST FARM CREDIT SERVICES, ACA

Contribute to the agricultural community and

Will become profitable customers for the association.

DESCRIPTION AND STATUS REPORT ON THE YOUNG, BEGINNING AND SMALL FARMERS PROGRAM



(dollars in thousands, except as noted)

Services Provided

constructive, safe, and sound basis.

Several credit and related services are offered through the Board approved YBS program directly

Program Definitions

and in coordination with other organizations that allow Northwest FCS to effectively serve the

Northwest FCS has a specific program in place to serve the credit and related needs of young,

needs within these producer segments:

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 are: 



To provide adequate Board oversight to ensure the needs of this market are met on a

The AgVision program enriches our ability to serve the young, beginning and small producers who are actively involved in farming and those who may not meet traditional credit

Young – A farmer, rancher, producer or harvester of aquatic products who is age 35 or

standards. AgVision customers account for approximately $274,000 of loan volume. Through

younger, as of the loan transaction date.

this program, special consideration is given in loan underwriting ratios, interest rate

Beginning – Any farmer, rancher, producer or harvester of aquatic products who has 10

reductions, and origination and appraisal fee waivers. More than $1,000 in fee waivers have

years or less farming or ranching experience, as of the loan transaction date.

been provided to AgVision customers since 2001, with over $70 in fees waived in 2013. 

Small – Any farmer, rancher, producer, or harvester of aquatic products who generates less

More than $490 has been reimbursed to customers for educational expenses, technology purchases, recordkeeping and tax planning and preparation services since the 2001 inception

than $250 in annual gross sales of agricultural or aquatic products.

of the AgVision program. Reimbursements totaled $66 in 2013.

Mission and Objectives



We have an advisory group of young, beginning and small farmers and ranchers who provide

Mission Statement

Northwest FCS with customer feedback, function as a liaison to association management and

To advance young, beginning, and small farmers' success via deliberate strategies in lending and

advance YBS program impact within the agricultural community.

professional development.



rewards young, beginning and small produces for continuing their management education

Objectives of the Program 

with interest rate reductions on new loans. Northwest FCS’ interest only, JumpStart loan program is designed to help entrepreneurs begin promising new ventures in agriculture

To support agriculture by encouraging and developing competent YBS customers to enter into or remain in agriculture by supporting their efforts to do so.



Two new programs were introduced in 2013 to YBS customers. The RateWise program



Customer education programs are targeted to young, beginning, and small producers

To recognize the challenges facing YBS customers attempting to obtain credit and establish a

focusing on areas such as farm economics, financial literacy, profitability, cash flow, personal

viable enterprise and to establish Northwest FCS as a leader in providing the products and

finance and succession planning, with several of these workshops conducted in Spanish each

services necessary for them to succeed.

year. 

To develop business relationships with next generation producers who: o

The Northwest FCS’ Business Management Center helps customers assess, understand and improve management practices through group and individual interactions via orientations,

Exhibit the management skills necessary to build a solid financial position,

workshops and consulting. Many YBS customers have taken part in these various workshops.



Northwest FCS provides donations and sponsors state and local Future Farmers of America

YBS Volume in the Northwest FCS Portfolio

(FFA) and 4-H activities and conventions, agricultural leadership and educational programs

The following table reflects the percentage of young, beginning and small producers’ loans in the

and other youth programs.

Northwest FCS loan portfolio as of December 31, 2013. Methods by which the Census demographics and the Northwest FCS’ data presented differ. The Census data is based on number

In 2013, Northwest FCS awarded over $46 in college scholarships to qualified high school

of producers, while the Northwest FCS’ data is based on number of loans.

seniors and $18 in scholarships to college students. 



Northwest FCS offers many services including crop insurance, life insurance and debt

Young, Beginning Small Farmers and Ranchers – Number and Volume of Loans

protection to help our YBS producers mitigate risk.

Outstanding (Including available commitment)

A portion of the young, beginning and small loan portfolio is supported by government guarantees, including guarantees by the Farm Service Agency (FSA) and the U.S. Department of Agriculture’s (USDA) Business and Industry Guaranteed Loan Program.

Government Guaranteed Loans to YBS Farmers and Ranchers

Goals and Results Quantitative targets have been established by Board policy for young, beginning and small producers’ loan volume and numbers based upon demographic data. These targets are as follows: 2013 Young, Beginning and Small Service Goals & Results

Regional Demographics The service area of Northwest FCS primarily includes the states of Washington, Montana, Oregon, Idaho and Alaska. The following table compares demographic information from the USDA’s 2007 Census of Agriculture for young, beginning and small producers in the territory to the 2002 census. This census is conducted every five years. 2012 Census data will be available in 2014. Northwest FCS met its young and small producer loan goals for 2013. The number of loans made Census of Agriculture - Young, Beginning and Small Producers

to beginning producers dropped below plan slightly in 2013 even though volume in this category

2007 vs. 2002

increased from prior year. Loans made to small producers increased significantly in 2013. The number of loans exceed the goals during 2013 due to the ProPartners relationship entered into in 2012. As more fully explained in Note 1 to the Consolidated Financial Statements, we participate in each loan within this relationship and the increase in our number of loans to small producers is directly related to this relationship.

The 2007 Census of Agriculture results show a 2 percent increase in young producers, a 3 percent decrease in beginning producers, and a 1 percent increase in small producers from 2002 to 2007.

NORTHWEST FARM CREDIT SERVICES, ACA

LOCAL ADVISORS Idaho Robert Ball Cody Bingham Jeff Blanksma, Jr. Adrian Boer Ray Carlson Connie Christensen Bill Clayton Cade Crapo Ron Elkin Carl Ellsworth Bruce Foster David Funk LeRoy Funk Brent Griffin Jackie Hillman Brian Huettig Ken Koompin Brent Lott Karen Lustig Marty Lux Dan Mader Ray Matsuura Kyle Meyer Ron Mio Greg Moss Kirk Nickerson Lisa Patterson Erick Peterson Nate Riggers Royce Schwenkfelder Kirt Schwieder Scott Searle Todd Simmons Robert Swainston Ryan Telford Bernie Teunissen Dale Thomas Camellia Thurgood Justin Tindall Ritchey Toevs Steven Toone James Udy Todd Webb Shane Webster

Montana Hamer Jerome Hammett Jerome Blackfoot Blackfoot Wilder St. Anthony Buhl Leadore Aberdeen Hansen Burley Rupert Hamer Hazelton American Falls Idaho Falls Cottonwood Nezperce Genesee Blackfoot Rathdrum Fruitland Ketchum Howe Heyburn Moscow Nez Perce Cambridge Idaho Falls Shelley Terreton Preston Richfield Caldwell Gooding Nampa Bruneau Aberdeen Grace American Falls Declo Rexburg

Les Arthun David Bell Bill Bergin, Jr. Mark Bergstrom Adam Billmayer Bart Bitz Ryan Bogar Keven Bradley Sandy Carey Tom Cheetham Calvin Danreuther Nels DeBruycker Vicki Eggebrecht Warren Flynn Conni French Joe Fretheim Scott Glasscock Beth Granger Greg Grove Chad Hansen Courtney Herzog Craig Henke Dale Hirsch Craig Iverson Alan Klempel Steven Lackman Tim Lake Bryan Mussard Corie Mydland Ken Olson Tracey Pearce Robert Peterson Trudi Peterson Shawn Rettig Dave Sattoriva Nancy Schlepp Kim Skinner Carmie Steffes Steve Swank Kurt Swanson Duane Talcott Dale Tarum Bob Taylor Kelly Toavs Mark Tombre Miles Torske Brian Tutvedt Larry Tveit, Jr. Bruce Udelhoven Mike Wallewein Steve Wood

Oregon Wilsall Great Falls Melstone Brady Hogeland Big Sandy Vida Cut Bank Boulder Redstone Loma Choteau Malta Townsend Malta Shelby Angela Great Falls Moccasin Dillon Rapelje Chester Kinsey Winnett Bloomfield Forsyth Polson Dillon Joliet Richey Twin Bridges Hobson Judith Gap Rudyard Hingham Ringling Hall Plevna Chinook Valier Hammond Richland Denton Wolf Point Savage Hardin Kalispell Fairview Winifred Sunburst Sheridan

Monet Allen Reed Anderson Roben Arnoldus Glenn Barrett John Boyer Greg Brink Ron Brown George Bussmann Warren Chamberlain Jason Chapman Tim Dahle Dan Dawson Mike DeWall Susan Doverspike Rod Fessler Tom Fessler Joe Finegan Bruce Ford Javier Goirigolzarri Dennis Harmon Matt Insko Kenneth Jensen Kyle Kenagy Jeremy Kennel Alan Keudell 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 Amy Doerfler Phelan John Reerslev Stephen Roth Shannon Rust Marc Staunton Anna Sullivan Steve Walker Eric White

Washington Grenada, CA Brownsville Cove Bonanza Haines Joseph Milton-Freewater Sixes Vale Klamath Falls The Dalles Roseburg Harrisburg Burns Madras Mt. Angel Cornelius Hermiston Roseburg Grants Pass LaGrande Vale Roseburg Monmouth Aumsville Portland Hood River Gaston Mt. Vernon Rufus Joseph Talent Tillamook Tangent Monmouth Helix Silver Lake Aumsville Junction City Brothers Echo Merrill Hereford Stanfield Nyssa

Dave Allan Jeff Bosma Russ Byerley Roger Canfield Bill Clark Mike Cobb Bill denHoed Richard DeRuwe Frank DeVries Scott Eschbach Patrick Escure Kevin Filbrun Stacy Gilmore Alan Groff Lori Hayles Jim Kile Cris Kincaid Jim Klaustermeyer Dave Klaveano Tristan Klesick Chris Kontos Steve Krupke David Lange Josh Lawrence Poppie Mantone Dan McKay Alan Mesman John Miller Pat Murphy Jeff Raap Sara Rolfs Jason Salvo Derek Schafer Jeff Schilter Danielle Scrupps Ben Smith Jerry Smith Lori Stonecipher Mark Tudor Jake Wardenaar Andy Werkhoven

Yakima Outlook Touchet Olympia Chelan Ephrata Grandview Dayton Lynden Yakima Quincy Pasco Pasco Wenatchee Pasco St. John Pullman Othello Pomeroy Stanwood Walla Walla Reardan Colfax Royal City Lyle Almira Mt. Vernon Toledo Chehalis Ellensburg Wenatchee Seattle Ritzville Olympia Ritzville Sequim Benton City Walla Walla Grandview Royal City Monroe

As of: 2/28/14

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

3490 Gabel Road, Suite 300 Billings, MT 59102 406-651-1670

3370 10th Street, Suite B Baker City, OR 97814 541-524-2920

265 E George Hopper Road Burlington, WA 98233 360-707-2353

370 N Meridian Street, Suite A Blackfoot, ID 83221 208-782-3800

1001 W Oak Street, Suite 200 Bozeman, MT 59772 406-556-7300

2345 NW Amberbrook Drive, Suite 100 Beaverton, OR 97006 503-844-7920

629 S Market Boulevard Chehalis, WA 98532 360-767-1100

1408 Pomerelle Avenue, Suite B Burley, ID 83318 208-678-6650

519 S Main Street Conrad, MT 59425 406-278-4600

650 E Pine Street, Suite 106A Central Point, OR 97502 541-665-6100

224 N Main Street Colfax, WA 99111 509-397-2840

501 King Street Cottonwood, ID 83522 208-962-2280

38A S Central Avenue Cut Bank, MT 59427 406-873-9070

2911 Tennyson Avenue, Suite 301 Eugene, OR 97408 541-685-6140

667 Grant Road, Suite 1 East Wenatchee, WA 98802 509-665-2160

2225 W Broadway Street, Suite A Idaho Falls, ID 83402 208-552-2300

134 E Reeder Street Dillon, MT 59725 406-683-1200

300 Klamath Avenue, Suite 200 Klamath Falls, OR 97601 541-850-7500

1501 E Yonezawa Boulevard Moses Lake, WA 98837 509-764-2700

2631 Nez Perce Drive, Suite 201 Lewiston, ID 83501 208-799-4800

501 1st Avenue S Glasgow, MT 59230 406-228-3900

308 SE 10th Street Ontario, OR 97914 541-823-2660

9530 Bedford Street Pasco, WA 99301 509-542-3720

16034 Equine Drive Nampa, ID 83687 208-468-1600

700 River Drive S Great Falls, MT 59405 406-268-2200

12 SW Nye Avenue Pendleton, OR 97801 541-278-3300

201 W Broadway Avenue, Suite B Ritzville, WA 99169 509-659-1105

102 N State Street, Suite 2 Preston, ID 83263 208-852-2145

1705 US Highway 2 NW, Suite A Havre, MT 59501 406-265-7878

3113 S Highway 97, Suite 100 Redmond, OR 97756 541-504-3500

1900 W Nickerson Street, Suite 215 Seattle, WA 98119 206-691-2000

1036 Erikson Drive Rexburg, ID 83440 208-656-2100

120 Wunderlin Street, Suite 6 Lewistown, MT 59457 406-538-7737

2222 NW Kline Street Roseburg, OR 97471 541-464-6700

1515 S Technology Boulevard, Suite B Spokane, WA 99224 509-340-5600

815 N College Road Twin Falls, ID 83303 208-732-1000

502 S Haynes Avenue Miles City, MT 59301 406-233-3100

650 Hawthorne Avenue SE, Suite 210 Salem, OR 97301 503-373-3000

2735 Allen Road Sunnyside, WA 98944 509-836-3080

139 River Vista Place, Suite 201 Twin Falls, ID 83301 208-732-1000

3021 Palmer Street, Suite B Missoula, MT 59808 406-532-4900

3591 Klindt Drive, Suite 110 The Dalles, OR 97058 541-298-3400

1 W Pine Street Walla Walla, WA 99362 509-525-2400

1700 S Assembly Street Spokane, Washington 99224 (509) 340-5300

123 N Central Avenue Sidney, MT 59270 406-433-3920

1360 N 16th Avenue Yakima, WA 98902 509-225-3200