Northwest FCS 2014 Annual Report by Northwest Farm Credit Services

MONTANA

IDAHO

OREGON

WASHINGTON

2014 A NNUA L REP OR T

ALASKA

Deeply Rooted in Northwest Diversity Visit us at:

northwestfcs.com

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

Northwest FCS

support organizations. As part of our rural outreach efforts, we’ve taken the first step to support mobile medical services by sponsoring a mammogram bus that will soon visit rural locations in Washington, Eastern Oregon, Northern Idaho and Western Montana.

The board held their three-day summer planning session in Coeur d’ Alene, Idaho.

Northwest FCS also partners with CoBank to give Rural Community Grants to meet the needs of rural communities as they age, grow and revitalize. In 2014, 83 rural grants were awarded, totaling nearly $150,000. From community centers to medical facilities, emergency response systems to city parks, we’re committed to giving back to the rural communities where we live and work. The heart of Northwest FCS’ mission and values lies in our cooperative structure. Through customer ownership, Northwest FCS customers have a unique say in the governance of this organization by electing board members with diverse backgrounds in agriculture, forestry and fisheries. More than 180 local advisors across our five-state territory also serve as the eyes and ears of the association, providing feedback on what we’re doing well and where we can improve. We are blessed to have tremendous diversity in our Northwest territory. The board works closely to make sure all voices, states and industries are heard. In 2015, newly appointed state presidents at the executive management level will bring an even stronger voice from the marketplace to the board and Management Executive Committee, as we continue to lead the association forward.

Karen Schott Board Chair

2014 Board of Directors

On Behalf of the Board

We are proud of the accomplishments made in 2014 which continue to reflect our customers’ success. On behalf of the board, thank you for your continued business and the trust you place in us.

Dave Nisbet Vice Chair - Bay Center, Washington, Karen Schott Chair - Broadview, Montana, Jim Farmer Nyssa, Oregon, Kevin Riel Yakima, Washington, Mark Gehring Salem, Oregon, Herb Karst Sunburst, Montana, Rick Barnes Callahan, California, Shawn Walters Newdale, Idaho, Julie Shiflett Spokane, Washington, Nate Riggers Nezperce, Idaho, Greg Hirai Wendell, Idaho, John Helle Dillon, Montana, Christy Burmeister-Smith Newman Lake, Washington, Dave Hedlin Mt. Vernon, Washington

BOARD MILL TOUR

Patronage Paid

Thanks to all of our customer-owners, board members, management team and employees for making 2014 another outstanding year. The association is in a very strong capital position due in large part to the success of our customers. We anticipate these strong capital levels will continue. We are pleased to again share our financial success with customer-owners. Northwest FCS returned $64.1 million, 28 percent of our 2014 net income to customers in the form of patronage.

Pictured left to right:

Board members spend time visiting customer operations to learn more about the diverse industries in the Northwest. In August, the board toured Idaho Forest Group’s Chilco Mill in Athol, Idaho.

($ in millions)

Having a strong financial position allows us to continue to invest in the rural communities we serve. Because our corporate roots are deeply ingrained in food production, we strongly support food bank networks that help feed the less fortunate in rural communities. In 2014 we donated nearly $300,000 to help Northwest food banks build warehouse capacity, purchase delivery trucks and cover operating expenses. Many of you may have seen Northwest FCS’ pink tractor this year at community events and trade shows, raising money and awareness for cancer research and

$36.0 2010

$53.3 2011

$55.2 2012

$58.1 2013

$64.1 2014

Northwest FCS

The board held their three-day summer planning session in Coeur d’ Alene, Idaho.

Karen Schott Board Chair

2014 Board of Directors

On Behalf of the Board

We are proud of the accomplishments made in 2014 which continue to reflect our customers’ success. On behalf of the board, thank you for your continued business and the trust you place in us.

BOARD MILL TOUR

Patronage Paid

Pictured left to right:

Board members spend time visiting customer operations to learn more about the diverse industries in the Northwest. In August, the board toured Idaho Forest Group’s Chilco Mill in Athol, Idaho.

($ in millions)

$36.0 2010

$53.3 2011

$55.2 2012

$58.1 2013

$64.1 2014

Northwest FCS

in our financial position. These “core four” are our strategic means of ensuring the organization is sustainable and relevant for the long term. To continue meeting the needs of this diverse marketplace, we implemented organizational changes that combine field employees from three lending and insurance divisions into a new group called Lending and Insurance. We’ve expanded our leadership strength and focus at state and branch levels to increase our local marketplace presence and better coordinate resources to serve our customers. Frontline lending and insurance staff are being led by four new state presidents who, in addition to being field-based leaders, will also serve on the Management Executive Committee. These changes ensure we are maintaining a strong, grassroots connection to our customers for managing day-to-day relationships. We’ve also named branch managers as the primary contacts for their local marketplaces to strengthen our capacity to serve customers. Combining our staff under common state leadership will improve our customer relationships, internal knowledge sharing, efficiency and enhance the capabilities of the next generation of leadership at Northwest FCS. Essentially, it will add capacity in each of the core capacity areas.

Customer Capacity

Phil DiPofi President and CEO

From the CEO

We enjoy an affordable and safe food supply thanks to the hard work and know-how of Northwest producers and processors. In the five Northwest states we serve, producers raise more than 200 different commodities. Northwest producers lead the nation in apple and wheat production, rank third in dairy production and fourth in cattle and calves. The food and fiber produced here is essential to supplying domestic and global demand. In fact, nearly sixteen percent of total U.S. agricultural exports are shipped from the Northwest. In 2014 most of our customers experienced another year of positive business conditions. As an extension of our customers’ success, Northwest FCS had another strong year of performance as well. Throughout 2014 we continued our relentless focus on building greater organizational capacity in each of the core foundational aspects of the business - with customers, in human resources, in operations and

Excellent customer experiences lead to more opportunities to build trust and increase customer engagement. To continue enhancing our customers’ experiences, we asked the Gallup research company to routinely survey our customers. Results of the first round were extremely high compared to the financial services industry as a whole. We’re very pleased with these results and have refocused efforts on areas where we can continue to improve. Helping customers succeed financially is the foundation for our success. That’s why we continue to invest in our Business Management Center. Educational programs, industry insights and business tools help our customers enhance their financial and management skills. In 2014 the number of customers attending financial workshops, conferences, webinars and industry symposiums increased significantly. Helping prepare the next generation of agriculture is an integral part of our cooperative mission. In late 2013, we introduced RateWise, a new program to reward young and beginning producers for continuing their management education with interest rate reductions on new loans. To date, 141 customers and potential customers registered for the RateWise program and a number of young producers took advantage of the credits they earned to reduce their costs on new loans or operating lines of credit.

Human Resource Capacity Among the many reasons Northwest FCS continues to be a successful financial cooperative is our people. We continue to recruit and retain top notch talent from across the Northwest. In 2014 we deepened our relationships with land grant universities to fill our talent pipeline with an abundance of qualified, ag-focused candidates for current and future staffing needs. In 2014 we also expanded our scholarship program to help provide higher education for families in rural America. We now offer land grant university, minority and veteran scholarships to attract talent into agriculture and the rural communities we serve. Being in a strong financial position allows us to continue investing in our people. Our employee engagement results remain very strong, but we know there’s always room for improvement. We continue to devote considerable time nurturing and developing our human resource talent which allows us to adapt and is a source of our distinct, competitive advantage.

billion, up 8.6 percent from $1.8 billion in 2013. Credit quality has continued to improve and problem loans are at historically low levels, which is a testament to the quality of our customer base and the risk management disciplines instilled into the culture of Northwest FCS. Most importantly, our strong financial performance in 2014 positions us well and creates the level of financial capacity needed to weather future downturns and serve our customers during volatile periods.

Looking ahead When customers give you more of their business, you know your business model is working and your employees are engaged in serving customers. I’m excited about the road ahead and see a great future for the association and the customers we serve. With decisions made in 2014, the strategy we’ve put in place, the organization we’ve designed, the world-class talent we have and more than 16,000 customers we serve, we are certainly well positioned to serve agriculture long into the future.

Operational Capacity Uncertainty is prevalent in any business. Our job is to assess various risks, identify how much is acceptable and determine what steps need to be taken to address them. Annually our board and management team identifies six to ten key risk areas in conjunction with our strategic planning process. We monitor these risks closely – from political risk to reputation risk – with strong oversight from the board. Data governance and information security are priority risk areas for us. In the past year we’ve heightened our efforts to make sure the company’s information and data is accurate, well organized and highly secure. We employ a technology provider with a highly competent security department who works closely with our staff to protect our customers’ information.

Capital

Net Income After Taxes

($ in billions)

($ in millions)

Financial Capacity By all measures, the association had another solid year of financial performance. We continue to generate significant capital through our earnings. Growing our capital allows us to invest in our people, technology and rural communities, while ensuring that the association remains strong and dependable long term. In 2014 net income was $228.1 million, a 3.7 percent decline from 2013. Net income was down slightly due to larger credit loss reversals in 2013. Our capital grew to $1.9

$1.3 2010

$1.4 2011

$1.6 2012

$1.8 2013

$1.9 2014

$150.1 $159.2 $187.3 $236.9 $228.1 2010 2011 2012 2013 2014

Northwest FCS

Customer Capacity

Phil DiPofi President and CEO

From the CEO

Capital

Net Income After Taxes

($ in billions)

($ in millions)

$1.3 2010

$1.4 2011

$1.6 2012

$1.8 2013

$1.9 2014

$150.1 $159.2 $187.3 $236.9 $228.1 2010 2011 2012 2013 2014

Deeply Rooted in

Northwest Diversity

Totals

NORTHWEST FCS

The bountiful Northwest is a region known for its vast diversity in agriculture, forestry and fisheries. Our customers produce and process hundreds of commodities with tremendous growth potential for the future. We are incredibly blessed to have the soil, water, weather, power, land grant universities and proximity to export markets that support some of the most sophisticated producers and processors in the world. More than 1.1 million jobs here are directly or indirectly tied to agriculture.

MONTANA

Our cooperativeâ&#x20AC;&#x2122;s strength is deeply rooted in this diverse marketplace. Our more than 16,000 customers range in size from young, beginning producers to large agribusinesses. They have widely diverse business models. When market cycles are down for some, others remain strong. This interdependence allows us to provide financing when our customers need it and remain even-handed during the downturns.

WASHINGTON

IDAHO OREGON ALASKA

Customers

16,583

Employees

667

Top Commodities Financed

2014 Patronage Total by State* ($ in millions)

Forest Products Dairy Cattle & Livestock Fruit & Tree Nuts Potatoes

Office Locations

Directors

Local Advisors

187

$5.5 ? MT

$14.3 ? ID

$12.9 ? OR

$21.3 ? WA

*Does not include patronage paid to customers living outside the four Northwest states.

Deeply Rooted in

Northwest Diversity

Totals

NORTHWEST FCS

MONTANA

WASHINGTON

IDAHO OREGON ALASKA

Customers

16,583

Employees

667

Top Commodities Financed

2014 Patronage Total by State* ($ in millions)

Forest Products Dairy Cattle & Livestock Fruit & Tree Nuts Potatoes

Office Locations

Directors

Local Advisors

187

$5.5 ? MT

$14.3 ? ID

$12.9 ? OR

$21.3 ? WA

*Does not include patronage paid to customers living outside the four Northwest states.

Montana

...he sold ALL his cattle when he knew the market had reached a peak.

Randy & Dawn Ridgeway

WHEAT

SHEEP

Wheat is Montana’s most valuable crop, followed by hay and barley.

Montana ranks seventh in the nation for the number of sheep and lambs produced.

HONEY Montana ranks fourth in the nation for honey production.

But, we get it.

Stanford, MT

Cattle, Wheat and Hay

Welcome to Big Sky Country. Vast prairies stretch to rolling farmland running west to the rugged Rocky Mountains. This is Montana. Raising cattle and grains is a way of life here. You’ll also find dry peas and lentils, sweet cherries, sugar beets and seed potatoes. In a state where cattle outnumber people, Montana is also home to a multimillion dollar honey and pollinating industry. Randy Ridgeway has been raising cattle here for 40 years. He got his first loan in 1972, right out of high school, to buy 500 acres of ground. He’s been buying land ever since. Today Randy and wife Dawn run a diversified cattle, wheat and hay operation on 13,000 acres near Stanford. When it comes to taking risks, Randy is calculating. He does his homework, researching everything from farm publications to Popular Science magazine. He’s been a student of the cattle markets for decades and bases his strategy 7

on experience working through the cycles. When the market is high and people are making money, he sells. When the market is down, and it’s tough to borrow money, he buys. Some people might call Randy unconventional, like the time he sold all his cattle – 500 head – when he knew the market had reached a peak. Some lenders just wouldn’t understand. But we get it. Randy is a man of character with a proven track record. We’ve had the privilege of helping him grow and diversify for 40 years. “Agriculture is not a one-year economic cycle,” says Randy. “If a lender doesn’t stick with you and see the cycles stretching out, you’re done. Northwest Farm Credit understands the cycles. They know credit, but they also recognize character. Their people invest the time to really understand their customers’ businesses and strategies to help them discern who will be able to weather the storms. That’s what makes them a strong, reliable lender for the long term.”

Northwest FCS Office Locations

Northwest FCS in

MONTANA Customers

2,912

Employees

Top Commodities Financed

Patronage Paid ($ in millions)

Grains Cattle & Livestock Hay

Office Locations

Directors

Local Advisors

$3.2 2010

$5.0 2011

$5.1 2012

$5.4 2013

$5.5 2014

Montana

...he sold ALL his cattle when he knew the market had reached a peak.

Randy & Dawn Ridgeway

WHEAT

SHEEP

Wheat is Montana’s most valuable crop, followed by hay and barley.

Montana ranks seventh in the nation for the number of sheep and lambs produced.

HONEY Montana ranks fourth in the nation for honey production.

But, we get it.

Stanford, MT

Cattle, Wheat and Hay

Northwest FCS Office Locations

Northwest FCS in

MONTANA Customers

2,912

Employees

Top Commodities Financed

Patronage Paid ($ in millions)

Grains Cattle & Livestock Hay

Office Locations

Directors

Local Advisors

$3.2 2010

$5.0 2011

$5.1 2012

$5.4 2013

$5.5 2014

Idaho

...the entire forest products industry was shaken.

We didn’t panic.

POTATOES Home to the first fast food french fry, Idaho ranks first in the nation for potato production with 31 percent of the U.S. total.

DAIRY Idaho ranks third in the nation for dairy production.

MINT Idaho ranks third in the nation for mint production. It takes less than 1 drop of mint oil to flavor seven packs of gum.

Scott Atkison

Coeur d’ Alene, ID Headquarters

Idaho Forest Group

Rolling hills, mountain spring water and warm sunshine provide optimum growing conditions for Idaho agriculture. The state is famous for potatoes, leading the nation in production. Yet, Idaho’s top commodity is milk and dairy products. In a state with two different time zones, Idaho produces 70 percent of the world’s sweet corn seed and ranks second in the nation for sugar beet production. Scott Atkison’s family has been in the timber business here for more than 70 years. In 2008 the family business, Bennett Forest Industries, joined forces with the Brinkmeyer family of Riley Creek Lumber to form the Idaho Forest Group. Today, IFG grows, harvests, manufactures and distributes sustainable wood products to markets around the globe. They employ more than 800 people. As one of the nation’s largest lumber producers, IFG has capacity to produce nearly one billion board feet per year. Or, roughly four million tons of logs through their five mills annually. 9

Consumer confidence and the housing market are the biggest drivers in the forest products industry. Imagine the impact of the 2008 recession. Scott says IFG’s unit revenue and volume fell significantly after the crash, putting the company into a negative cash flow position. The entire industry was shaken. Surprisingly, IFG’s lender didn’t panic. “The Farm Credit System is acutely aware of commodity cycles,” says Scott. “For a couple years we were talking about a downturn, though I don’t think any of us knew how bad it was going to get. Ultimately, Farm Credit understands our business. They know we’re a highly efficient, low cost producer and our margins would come back. They stood by us.” Today IFG is upgrading their manufacturing facility in Lewiston to increase capacity. With technology enhancements the mill will produce approximately 400 million board feet of dried lumber annually. Northwest FCS, CoBank and seven Farm Credit System entities proudly participated in funding the $80 million project.

Northwest FCS Office Locations

Northwest FCS in

IDAHO Customers

2,866

Employees

105

Top Commodities Financed

Patronage Paid ($ in millions)

Dairy Potatoes Cattle & Livestock Sugar Beets Grains

Office Locations

Directors

Local Advisors

$9.8 2010

$13.9 2011

$12.9 2012

$13.3 2013

$14.3 2014

Idaho

...the entire forest products industry was shaken.

We didn’t panic.

POTATOES Home to the first fast food french fry, Idaho ranks first in the nation for potato production with 31 percent of the U.S. total.

DAIRY Idaho ranks third in the nation for dairy production.

MINT Idaho ranks third in the nation for mint production. It takes less than 1 drop of mint oil to flavor seven packs of gum.

Scott Atkison

Coeur d’ Alene, ID Headquarters

Idaho Forest Group

Northwest FCS Office Locations

Northwest FCS in

IDAHO Customers

2,866

Employees

105

Top Commodities Financed

Patronage Paid ($ in millions)

Dairy Potatoes Cattle & Livestock Sugar Beets Grains

Office Locations

Directors

Local Advisors

$9.8 2010

$13.9 2011

$12.9 2012

$13.3 2013

$14.3 2014

Oregon

...Tamera didn’t know if she was necessarily a farmer.

We did.

HAZELNUTS GREENHOUSE / NURSERY CATTLE Livestock and poultry account for 34 percent of Oregon’s total farm sales.

Oregon ranks fifth nationally for nursery, greenhouse and sod production.

Oregon leads the nation in hazelnut production.

Tamera Campbell

Klamath Falls, OR

Klamath Algae Products

Oregon agriculture is as varied as the climate that sustains it, with 37,000 farms growing more than 220 different commodities. With mild temperatures and abundant rainfall in the west, Oregon boasts one of the fastest tree growing areas in the nation. Wine grapes, nuts and vegetables grow in the lush Willamette Valley. Dryer climates in the state support hay, cattle and grains. In southern Oregon, Klamath Lake is world renowned in the nutraceutical industry for blue-green algae. Tamera Campbell grew up here. In 1978 she met the scientist who discovered these rare algae while researching super foods for astronauts. Today, Klamath Algae Products harvests, processes and markets premium AFA algae products under the E3Live brand to 65 different countries. Tamera has seen algae harvesters come and go for 20 years. The early days of the “green rush” at Klamath Lake drew entrepreneurs looking to get rich quick. Most 11

underestimated the challenges and went belly up. Tamera and husband Michael persevered and grew the business through savings and credit cards. To expand further, they needed a lender to understand their business. Tamera didn’t know if she was necessarily a farmer. As an agricultural lender, we did. “Mother nature is our boss,” says Tamera. “Our production is based on weather and a host of other variables. We needed a lender to stand behind us and Northwest Farm Credit listened. They looked deeper into our operation and asked lots of questions. To me, transparency is huge. We recognize the value of this relationship and we’re very grateful for it.” Klamath Algae Products now employs more than 60 people, including a general manager with experience in lean manufacturing. FedEx has added a dedicated, daily flight to transport their products abroad. In a place known for meat and potatoes, Tamera and Michael are embracing opportunities to bring innovative ideas to agriculture

Northwest FCS Office Locations

Northwest FCS in

OREGON Customers

3,826

Employees

108

Top Commodities Financed

Patronage Paid ($ in millions)

Forest Products Diversified Crops Nurseries Cattle & Livestock Fruit & Tree Nuts

Office Locations

Directors

Local Advisors

$8.0 2010

$11.5 2011

$11.8 2012

$12.3 2013

$12.9 2014

Oregon

...Tamera didn’t know if she was necessarily a farmer.

We did.

HAZELNUTS GREENHOUSE / NURSERY CATTLE Livestock and poultry account for 34 percent of Oregon’s total farm sales.

Oregon ranks fifth nationally for nursery, greenhouse and sod production.

Oregon leads the nation in hazelnut production.

Tamera Campbell

Klamath Falls, OR

Klamath Algae Products

Northwest FCS Office Locations

Northwest FCS in

OREGON Customers

3,826

Employees

108

Top Commodities Financed

Patronage Paid ($ in millions)

Forest Products Diversified Crops Nurseries Cattle & Livestock Fruit & Tree Nuts

Office Locations

Directors

Local Advisors

$8.0 2010

$11.5 2011

$11.8 2012

$12.3 2013

$12.9 2014

Washington

APPLES

WHEAT

...the strongest bonds are rooted in adversity.

Bill & Sid Wavrin Yakima, WA

Sunny Dene Ranch

The landscape shifts from rolling wheat fields to fertile valleys, mossy forests to coastal estuaries. This spectacular variety of soils and climates makes Washington one of the most productive growing regions in the world. The Evergreen State ranks first in U.S. production for apples, hops and raspberries, and second only to California for the diversity of crops grown. Deep-water ports and close proximity to Asian markets are ideal for agricultural trade. Bill Wavrin’s interest in the dairy business started with his veterinary work. He didn’t grow up in agriculture. In 1990 he bought 80 acres and 180 cows in the Yakima Valley, one of the largest dairy-producing areas in the country. Bill and his brother Sid now run three dairies with close to 5,000 cows and 5,000 acres of farm ground. People say the strongest bonds are often rooted in adversity. In December 2003 a dairy cow from the Wavrins’ ranch tested positive for Mad Cow Disease, the first in the United States. The family was involved in a huge dairy expansion back then. 13

More than half of the apples grown in the U.S. for fresh consumption come from Washington orchards.

The Washington wheat industry contributes nearly $1.2 billion in production value to the state’s economy.

VINEYARD Washington is the nation’s second largest wine producer.

We stayed the course. As their lender, we knew the Wavrins were top notch producers. This could happen to anyone. With all things considered we simply told them, “Stay the course. We’re here to support you.”

Northwest FCS Office Locations

WASHINGTON Customers

6,305

“Everything comes down to the people you’re working with,” says Bill. “In the beginning you have to take a risk to build a relationship and earn each other’s trust. You need to have good fiscal discipline and partners who don’t over react to difficult cycles or situations. We’ve always been conservative fiscally. Our relationship with Northwest Farm Credit has been transparent, comfortable and constructive since the beginning.” The Wavrins’ newest expansion takes them to Western Washington where they’ll soon open a cheese-making facility. This consumer-focused business will be very different from the commodity markets. But, the Wavrins are excited about the opportunities. For two brothers who didn’t grow up in agriculture, they haven’t backed down from a challenge yet.

Northwest FCS in

Employees

372

Top Commodities Financed

Patronage Paid ($ in millions)

Fruit & Tree Nuts Forest Products Dairy Fisheries Wine & Vineyards

Office Locations

Directors

Headquarters

Local Advisors

$9.9 2010

$15.1 2011

$16.5 2012

$19.2 2013

$21.3 2014

Washington

APPLES

WHEAT

...the strongest bonds are rooted in adversity.

Bill & Sid Wavrin Yakima, WA

Sunny Dene Ranch

More than half of the apples grown in the U.S. for fresh consumption come from Washington orchards.

The Washington wheat industry contributes nearly $1.2 billion in production value to the state’s economy.

VINEYARD Washington is the nation’s second largest wine producer.

Northwest FCS Office Locations

WASHINGTON Customers

6,305

Northwest FCS in

Employees

372

Top Commodities Financed

Patronage Paid ($ in millions)

Fruit & Tree Nuts Forest Products Dairy Fisheries Wine & Vineyards

Office Locations

Directors

Headquarters

Local Advisors

$9.9 2010

$15.1 2011

$16.5 2012

$19.2 2013

$21.3 2014

Alaska FARMING

...if the deal goes south, he can miss an entire season. Liam Corcoran Cordova, AK

TIMBER

GREENHOUSE / NURSERY

In 2012, log and wood products sales in Alaska totaled about $133 million.

Greenhouse and nursery crops are the fastest-growing segment of Alaska’s ag industry.

Alaska is the largest state (365 million acres), but fewer than one million acres are farmed.

As a lender, we get it.

Fishing Industry

With a land mass larger than Texas, California and Montana combined, Alaska has three million lakes, 3,000 rivers and 34,000 miles of coastline. It’s one of the most bountiful fishing regions in the world. From these pristine waters commercial fisherman harvest all five species of Pacific salmon, four species of crab, groundfish, shrimp, herring, sablefish, pollock and Pacific halibut. Annually, the seafood industry contributes an estimated $5.8 billion to the Alaskan economy.

It’s surprising to see someone in their 20s with any net worth to speak of, let alone a 20-year-old with ambitions to build a new boat. Construction projects can be risky. If the deal goes south you can miss an entire fishing season or end up with a vessel you can’t resell. As a lender, we get it. We’ve been financing this industry for more than 40 years. With Liam’s impressive track record we helped him finance a new, 32-foot bowpicker in 2009 through the AgVision program for young, beginning and small producers.

Liam Corcoran is a young man ahead of his time. He started salmon fishing with his dad in Cordova, Alaska, when he was 12. He bought a starter boat at 17 and leased a limited entry permit. Permits are tough to get in the salmon fishery and values fluctuate based on fishing seasons and market prices. Liam saved his money. After fishing his first season solo at 18 he bought a $55,000 permit. Today the value is closer to $255,000.

“You have to keep yourself aligned financially and use good business sense to make necessary moves,” says Liam. “Things change quickly in this industry and you have to be ready for anything. I watched my dad fish his whole life. I saw the downtimes, like when farm-raised fish hit the market. If people don’t have cash reserves built up it’s hard to weather the storms. Having a lender who understands your business makes it a lot easier.”

CHUKCHI SEA

BEAUFORT SEA Arctic - Yukon - Kuskokwim Region

Kotzebue Sound

Arctic Circle Yukon River

Tapana River Kuskokwim River Copper River

BERING SEA

Bristol Bay Westward Region

Top Commodities Financed

Prince William Sound

Fisheries Energy Forest Products

Central Region

Southeast Region

Northwest FCS in

ALASKA

Alaska customers are primarily served through Northwest FCS’ Seattle office. Seattle is home port to hundreds of vessels fishing in Alaska and along the West Coast of the United States. A Fisheries Local Advisory Committee was formed in 2014 to represent our diverse fisheries customers. 16

Alaska FARMING

...if the deal goes south, he can miss an entire season. Liam Corcoran Cordova, AK

TIMBER

GREENHOUSE / NURSERY

In 2012, log and wood products sales in Alaska totaled about $133 million.

Greenhouse and nursery crops are the fastest-growing segment of Alaska’s ag industry.

Alaska is the largest state (365 million acres), but fewer than one million acres are farmed.

As a lender, we get it.

Fishing Industry

CHUKCHI SEA

BEAUFORT SEA Arctic - Yukon - Kuskokwim Region

Kotzebue Sound

Arctic Circle Yukon River

Tapana River Kuskokwim River Copper River

BERING SEA

Bristol Bay Westward Region

Top Commodities Financed

Prince William Sound

Fisheries Energy Forest Products

Central Region

Southeast Region

Northwest FCS in

ALASKA

State Presidents and Local Advisors MONTANA

IDAHO

OREGON

WASHINGTON

Bill Perry

Blair Wilson

Brent Fetsch

Mandy Minick

State President Les Arthun David Bell Bill Bergin Mark Bergstrom Adam Billmayer Bart Bitz Ryan Bogar Jonathan Bolstad Keven Bradley Sandy Carey Calvin Danreuther Nels DeBruycker Vicki Eggebrecht Warren Flynn Conni French Joe Fretheim Scott Glasscock Beth Granger Greg Grove Chad Hansen Craig Henke Courtney Herzog Dale Hirsch Alan Klempel Steve Lackman Tim Lake Bryan Mussard Corie Mydland Ken Olson Jon Owen Miles Passmore 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

State President

State President Wilsall Great Falls Melstone Brady Hogeland Big Sandy Vida Homestead Cut Bank Boulder Loma Choteau Malta Townsend Malta Shelby Angela Great Falls Moccasin Dillon Chester Rapelje Kinsey Bloomfield Forsyth Polson Dillon Joliet Richey Geraldine Somers Sheridan Hobson Judith Gap Rudyard Hingham Ringling Hall Plevna Chinook Valier Hammond Richland Denton Wolf Point Savage Hardin Kalispell Fairview Winifred Conrad Sheridan

Robert Ball Jeff Bartschi Cody Bingham Jeff Blanksma, Jr. Adrian Boer Ray Carlson Connie Christensen Cade Crapo Ron Elkin Carl Ellsworth Bruce Foster David Funk LeRoy Funk Brent Griffin Jackie Hillman Brian Huettig Joshua Jones Brent Lott Karen Lustig Marty Lux Dan Mader Ray Matsuura Kyle Meyer Ron Mio Greg Moss Lisa Patterson Greg Payne Erick Peterson 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 Pete Wittman Matt Wolff

Hamer Montpelier Jerome Hammett Jerome Blackfoot Blackfoot St. Anthony Buhl Leadore Aberdeen Hansen Burley Rupert Hamer Hazelton Troy Idaho Falls Cottonwood Nezperce Genesee Blackfoot Rathdrum Fruitland Ketchum Heyburn Caldwell Moscow Cambridge Idaho Falls Shelley Terreton Preston Richfield Caldwell Gooding Nampa Bruneau Aberdeen Grace American Falls Declo Rexburg Lapwai Boise

Monet Allen Reed Anderson Roben Arnoldus Glenn Barrett Alex Blosser John Boyer Greg Brink Ron Brown George Bussmann Warren Chamberlain Jason Chapman Tim Dahle Dan Dawson Paul Denfeld 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 Diane Kunkel Leland Lage Sharon Livingston Bill Martin Scott McClaran Ron Meyer Greg Myers David Neal Larry Parker Alan Parks Amy Doerfler Phelan John Reerslev Stephen Roth Shannon Rust Marc Staunton Anna Sullivan Steve Walker Eric White

State President Montague, CA Brownsville Cove Bonanza Dundee Haines Joseph Milton-Freewater Sixes Vale Klamath Falls The Dalles Roseburg Hillsboro Harrisburg Burns Madras Mt. Angel Cornelius Hermiston Roseburg Grants Pass LaGrande Vale Roseburg Monmouth Aumsville Portland Hood River Mt. Vernon Rufus Joseph Talent Tillamook Tangent Helix Silver Lake Aumsville Junction City Brothers Echo Merrill Hereford Stanfield Nyssa

Dave Allan Loren Beale Jeff Bosma Russ Byerley Roger Canfield Bill Clark Mike Cobb Bill denHoed Richard DeRuwe Frank DeVries Scott Eschbach Patrick Escure Kevin Filbrun Steve Fish Stacy Gilmore Alan Groff Lori Hayles Ian Jefferds Cris Kincaid Jim Klaustermeyer, Jr. Tristan Klesick Chris Kontos Steve Krupke David Lange Josh Lawrence Poppie Mantone Dan McKay Alan Mesman John Miller Pat Murphy Brian Oâ&#x20AC;&#x2122;Leary Eric Olson Jeff Raap Sara Rolfs Jason Salvo Derek Schafer Jeff Schilter Danielle Scrupps Ben Smith Jerry Smith Jim Stone Lori Stonecipher Mark Tudor Jake Wardenaar Andy Werkhoven

Wapato Pomeroy Outlook Touchet Olympia Chelan Ephrata Grandview Dayton Lynden Yakima Quincy Pasco Sitka, AK Pasco Wenatchee Pasco Coupeville Pullman Othello Stanwood Walla Walla Reardan Colfax Royal City Bingen Almira Mt. Vernon Toledo Chehalis Seattle Anchorage, AK Ellensburg Wenatchee Seattle Ritzville Olympia Ritzville Sequim Benton City Lakewood Walla Walla Grandview Royal City Monroe

As of: 1/07/15

2014 NORTHWEST FARM CREDIT SERVICES, ACA Annual Report to Stockholders

NORTHWEST FARM CREDIT SERVICES, ACA

The undersigned certify that they have reviewed the 2014 Annual Report to Stockholders and it has been prepared in accordance with all applicable statutory or regulatory requirements and the

REPORT OF MANAGEMENT

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

Tom Nakano

Karen Schott

President and CEO

EVP-Chief Administrative and

Chair of the Board

March 11, 2015

Financial Officer

March 11, 2015

United States of America, and, in the opinion of management, fairly present the financial condition

Phil DiPofi

of Northwest FCS. Other financial information included in the 2014 Annual Report to Stockholders is consistent with that in the financial statements.

March 11, 2015 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 that 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. 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, independent auditors and 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 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

Based on the assessment performed, Northwest FCS concluded that as of December 31, 2014, the internal control over financial reporting was effective. Additionally, based on this assessment,

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Northwest FCS determined there were no material weaknesses in the internal control over financial reporting as of December 31, 2014. There were no material changes in the internal control over financial reporting during the year ended December 31, 2014.

Management of Northwest FCS is responsible for establishing and maintaining adequate internal control over financial reporting for Northwest FCS’ consolidated financial statements. For purposes of this report “internal control over financial reporting” is defined as a process designed by or

Phil DiPofi

Tom Nakano

Karen Schott

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

President and CEO

EVP-Chief Administrative and

Chair of the Board

persons performing similar functions, and effected by its board of directors, management and

March 11, 2015

Financial Officer

March 11, 2015

other personnel, to provide reasonable assurance regarding the reliability of financial reporting

March 11, 2015

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, 2014. 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.

NORTHWEST FARM CREDIT SERVICES, ACA

Based on the foregoing review and discussions, and relying thereon, the Audit Committee recommended the Northwest FCS Board of Directors include the audited financial statements in the

REPORT OF AUDIT COMMITTEE

annual report as of and for the year ended December 31, 2014.

The Audit Committee is composed of seven members of the Northwest FCS Board of Directors. In 2014, the Audit Committee met five times in person and participated in two 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

March 11, 2015

PricewaterhouseCoopers LLP (PwC) as independent auditors for 2014. The Audit Committee’s responsibilities are described more fully in the Internal Controls Policy and the Audit Committee

Rick Barnes

Operating Statement.

Jim Farmer John Helle

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

Nate Riggers

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

Julie Shiflett

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, 2014, 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. 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 and financial services reforms; possible amendments to, and interpretations of, risk-based capital

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

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, 2014. The

As of January 1, 2015 we are one of 76 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 99 years. The System’s

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

mission is to provide sound and dependable credit to American farmers, ranchers, producers or harvesters of aquatic products, rural residents and farm-related businesses through a member-

of the Audit Committee.

owned 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,

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, fees appraisals and business management services. Our

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

success begins with our extensive agricultural experience and knowledge of the market and is

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

dependent on the 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.

income; United States and global economic conditions; sovereign or regulatory actions; the level of interest rates; changes in assumptions underlying the valuations of financial instruments; changes

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

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

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

available free of charge on CoBank’s website, www.cobank.com, or may be obtained at no charge

Cattle and Livestock: The principal commodity financed by Northwest FCS in this sector is beef

by contacting Northwest FCS. Annual reports are available within 75 days after year end and

cattle. The U.S. cattle market experienced an exceptional year in 2014. Prices should remain

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

strong across all cattle classes in 2015, supported by short supplies and record beef prices. However, price volatility and the rising cost of feeder cattle has resulted in extreme margin calls

2014 Financial Highlights

and increased capital needs for cattle feeders with hedging programs.

The year ended December 31, 2014 reflected strong financial performance. Our earnings and capital position allowed us to declare a cash patronage distribution of $64,134 representing a

Fruit and Tree Nuts: The principal commodity financed by Northwest FCS in this sector is apples.

return of approximately 75 basis points for the majority of our eligible customers based on their

A confluence of events is pressuring Northwest apple markets. The largest crop in Northwest

average 2014 loan balances. Other highlights include:

history is matched with large U.S. and global crops. Prices hit lows not seen in nearly a decade this

•

season, but are steady to firming as supplies from competing regions in the U.S. decrease. Given

Our loan portfolio volume increased 6.5 percent in 2014, with an ending total loan and

significant pressure to ship fruit, export market sales are critical to price support and clearing the

accrued interest balance of $9.8 billion. During the same period our nonaccrual loan volume

pipeline ahead of the 2015-16 crop. Although shipments are ahead of normal, the pace so far has

declined significantly by $41,557, or 48.0 percent.

been insufficient to assure the crop will be sold out. Export market growth has been constrained by

Net income for the year was $228,120, a 3.7 percent decline from 2013, mainly due to larger

trade restrictions and slowdowns at West Coast ports.

credit loss reversals in the prior year, partially offset by higher net interest income and

Potatoes: Open potato prices are above breakeven in the Northwest, but strong 2014 potato

noninterest income in 2014. •

production and year-over-year declines in fresh potato exports limit upside market potential.

Capital levels remained strong and well in excess of regulatory minimums. As of December

Export challenges are exacerbated by port delays and slowed shipments. Delayed exports are

31, 2014, our members’ equity totaled approximately $1.9 billion, and our members’ equity as

increasing potato processors’ finished product inventories and slowing depletion of raw product

a percentage of total assets was 18.6 percent.

inventories.

Commodity Review and Outlook

Grains: Grain markets remain volatile, but the current marketplace is providing profit

The following highlights the general health of agricultural commodities with the greatest

opportunities for growers. Wheat prices received a boost from Russia’s announcement of a wheat

concentrations in our loan portfolio.

export tax that will be levied from February to June. Higher wheat prices are met with lower diesel prices. Northwest FCS’ peer financial benchmarks illustrate the potential impact of lower fuel costs

Forest Products: U.S. housing starts are the primary driver of the U.S. forest products markets.

on growers’ bottom lines. Across five years, fuel expenses averaged 6.9 percent of wheat

While housing starts continue to fall below expectations, new home construction in 2014 increased

producers’ total operating expenses. Notwithstanding this support, wheat producers face

to an annualized rate of over one million units for the first time since 2007. Continued economic

headwinds including a higher value U.S. dollar, ample world wheat supplies and generally

improvement may lead to an increased number of housing starts in 2015. Meanwhile, lower lumber

favorable new crop conditions.

and panel prices coupled with higher log costs are challenging operations at Northwest mills.

For more information on the industries served by Northwest FCS, visit Industry Insights in the

Dairy: Following a year of robust profitability, pessimistic global markets and dim export prospects

Resources section of www.northwestfcs.com.

will pressure U.S. milk prices lower in 2015. Milk prices peaked this fall and have since dropped significantly. Class III Milk Futures through June 2015 foreshadow additional declines, with prices expected to bottom near $15 per cwt. However, Northwest dairies are generally well positioned to manage lower milk prices, supported by strong 2014 profits.

FINANCIAL CONDITION

Loans, impaired loans and related accrued interest, where appropriate, are presented in the following table:

Loan Portfolio Total loans and accrued interest outstanding were $9.8 billion at December 31, 2014, an increase of $597,606, or 6.5 percent from the December 31, 2013 balance of $9.2 billion due primarily to our customers experiencing another successful year. During 2013, total loans and accrued interest increased slightly at 1.8 percent as a result of customer liquidity and less dependence on operating funding. Loans and accrued interest by type are presented in the following table:

Total impaired loans and related accrued interest has continued to decline for each of the years presented. For each year, the decrease is mainly driven by the nonaccrual loan changes which are summarized in the following table:

As of December 31, 2014, nonaccrual loans that were current as to principal and interest

Loan concentrations by state are presented in the following table:

installments totaled $27,844 representing 61.9 percent of the nonaccrual loan portfolio compared to $77,785 representing 89.9 percent of the nonaccrual loan portfolio at December 31, 2013, and $125,206 representing 73.5 percent of the nonaccrual loan portfolio at December 31, 2012. Additional loan information is in Note 3 to the Consolidated Financial Statements.

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

conditions, general economic and political conditions, weather-related conditions, and changes in

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

the character, composition, and performance of the portfolio, among other factors. The allowance

table:

for credit losses is calculated 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

Other Assets

payment history; the prospects for support from any financially responsible guarantor; and, if

Other assets were $100,209 at December 31, 2014, an increase of $8,413 as compared to 2013,

appropriate, the estimated net realizable value of any collateral. The allowance for loan losses

primarily due to increased patronage receivables. Others assets were $91,796 at December 31,

attributable to these loans is established by a process that estimates the probable loss inherent in

2013, an increase of $4,385 as compared to 2012 as a result of an increase in our investment in

the loans, taking into account various historical and projected factors, internal risk ratings,

AgDirect, LLP.

regulatory oversight, geographic location, industry and other factors.

Other Liabilities

We maintain a reserve for unfunded lending commitments that reflects our best estimate of losses

Other liabilities were $155,531 at December 31, 2014, an increase of $36,976 as compared to

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

2013, primarily due to an increase in the pension obligation caused by actuarial assumption

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

changes including updated mortality tables and discount rates. Other increases include the reserve

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

for unfunded lending commitments and patronage distribution liability. Other liabilities were

Balance Sheet and totaled $27,000, $15,000 and $12,000 at December 31, 2014, 2013 and 2012,

$118,555 at December 31, 2013, a decrease of $11,739 as compared to 2012, mainly related to a

respectively. During 2014, a new allowance for credit losses model was implemented, which

decline in the pension obligation.

resulted in a $7,000 increase to the reserve for unfunded lending commitments and a corresponding decrease to the allowance for loan losses.

RESULTS OF OPERATIONS Net income for the year ended December 31, 2014, was $228,120, compared to $236,889 for

The ALL reserves at December 31, 2014, 2013 and 2012 totaled $83,000, $97,000 and $128,000,

2013 and $187,255 for 2012. The following table provides detail of changes in the components of

respectively. Specific loan loss reserves at December 31, 2014, 2013 and 2012 totaled $7,232,

net income:

$16,405 and $47,971, respectively. For 2014, the specific reserve was mainly related to the nursery industry. For 2013 and 2012, 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 that were impacted by the overall downturn in the U.S. economy, such as nursery.

Net Interest Income: Net interest income was $10,445 higher in 2014 compared to 2013

$34,677. In 2012, our charge-offs, nonaccrual loans and adverse loans were higher than historical

primarily due to the lower cost of interest bearing liabilities. Net interest income was $3,816 lower

averages, and resulted in a provision for credit losses of $30,490. Charge-offs net of recoveries

in 2013 compared to 2012 primarily due to a decrease in loan spread caused in part by greater

totaled $28,990 in 2012, and were concentrated in the dairy and nursery sectors.

prepayment expense, competitive pressures and an increase in the average loan volume in lower

Noninterest income: In 2014, noninterest income increased $12,998 when compared to 2013,

spread lines of business.

primarily related to an increase in Patronage income of $4,370, increased gains on sales of Other property owned of $4,168 and higher Financially related services income of $2,812. The Patronage

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

income increase was mainly due to higher patronage income on sold loan volume resulting from

earning assets and interest-bearing liabilities between the years ended December 31, 2014 and

higher average loan balances as compared to the prior year. The gains on sales of Other property

2013, and between the years ended December 31, 2013 and 2012, are presented in the following

owned increased mainly as the result of one significant transaction that occurred during the

table:

current year. The Financially related services income was driven by profit sharing with insurance companies in 2014, compared to no profit sharing in 2013. The decrease in noninterest income of $10,225 in 2013 when compared to 2012 was primarily due to a $11,238 refund received in 2012 from the Farm Credit System Insurance Corporation (Insurance Corporation) related to the Farm Credit Insurance Fund (Insurance Fund). As described in Note 1 to the Consolidated Financial Statements when the Insurance Fund exceeds the statutory 2 percent secure base amount, the Insurance Corporation evaluates the insurance premium assessment rate for Farm Credit System banks and may refund excess amounts. The Insurance Fund ended 2011 above the secure base amount, and consequently in the second quarter of 2012,

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

the Insurance Corporation distributed to Farm Credit entities the excess amount. No similar

portfolio are presented in the following table:

refunds were received in 2013. 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. Operating expense: In 2014, operating expenses increased by $2,471 when compared to 2013. The increase was caused in part by a reversal of a contingent liability related to a revenue tax in 2013 which reduced operating expenses in that year by $1,638. The remaining increase in operating expenses as compared to 2013 was driven by higher assessment rates for the Insurance Fund. 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 Insurance Fund

Credit loss reversal/Provision for credit losses: In 2014, credit quality has continued to

premiums of $3,190, related to the assessment rate increasing, purchased services of $2,626, and

improve resulting in a credit loss reversal of $2,570. In 2013, credit quality improved significantly

salaries and benefits of $2,612. Purchased services increased primarily due to technology services

and net recoveries of $6,677 were recorded, which resulted in a credit loss reversal in 2013 of

we purchase from Financial Partners, Inc. as well as costs associated with contract labor for a new

provide liquidity for disaster recovery or other emergency situations. At December 31, 2014, no

loan accounting system. Salaries and benefits were higher than in the previous year due to normal

balance was outstanding on this line of credit.

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

Asset/Liability Management

assets that were fully depreciated in the prior year. Additionally, the reversal of a portion of the

In the normal course of lending activities, we are subject to interest rate risk. Our asset/liability

contingent liability recorded previously related to revenue taxes resulted in a reduction of

management objective is monitored and managed within interest rate risk limits designed to target

operating expenses in 2013 as discussed above.

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

Provision for income taxes: Income tax expense was $1,995 lower than in the previous year.

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

The effective tax rate was 2.1 percent for the year ended December 31, 2014 as compared to 2.9

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

percent for 2013. The reduction in taxes was primarily related to the reduction in income from

risk within the policy limits approved by the Northwest FCS Board of Directors (the board) through

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

the strategies established by the Asset/Liability Committee (ALCO), there is no assurance that

tax expense in 2013 decreased $2,468 as compared to 2012. Contributing to the reduction was the

these mismatches and exposures will not adversely impact our earnings and capital. Our overall

reversal of a $1,000 uncertain tax position recorded in a previous year as the uncertainty related to

objective is to develop appropriately priced and structured loan products for our customersâ&#x20AC;&#x2122; benefit

the state tax position was resolved. The remaining reduction was primarily related to a decline in

and fund these products with a blend of equity and debt obligations.

the income from non-patronage sourced business.

The interest rate gap analysis shown in the following table presents a comparison of interest-

Liquidity and Funding Sources

earning assets and interest-bearing liabilities in defined time segments at December 31, 2014. The

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

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

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

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

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

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

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

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

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

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

can result in increases to our funding costs. The GFA also requires us to comply with FCA

market value.

regulations regarding liquidity. To meet this requirement, we are allocated a share of CoBankâ&#x20AC;&#x2122;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. CoBankâ&#x20AC;&#x2122;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

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 interest rates in 2014, 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, 2014, all interest rate risk-related measures were within the 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 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 Northwest FCS’ repricing gap as of December 31, 2014 is characterized as slightly asset sensitive.

losses and enhance our capital ratios. These transactions amortize down and as such financial

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

benefits diminish over time.

favorable when interest rates are declining. Given some of the inherent weaknesses with interest rate gap analysis, simulation models are used to develop additional interest rate sensitivity

For the year ended December 31, 2014, total members’ equity increased $150,726 or 8.6 percent

measures and estimates. The assumptions used to produce anticipated results are periodically

from December 31, 2013. The increase in members’ equity was primarily due to earnings of

reviewed and models are tested to help ensure reasonable performance. Various simulations are

$228,120, partially offset by the patronage distribution accrued of $64,134 and a decrease in other

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

comprehensive income of $12,985.

interest rate risk and make adjustments as needed to our products and related funding strategies. As displayed in the following table we exceeded the minimum regulatory requirements (noted parenthetically):

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 ALCO monthly and reported to the board at least quarterly. The board policy limits for 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 U.S. Treasury bill interest rate is less than 4 percent, then the downward shock is equal to one-half of the threemonth U.S. 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 2015. See Note 8 to the Consolidated Financial Statements for further discussion of these regulatory ratios. NORTHWEST FARM CREDIT SERVICES, ACA

Phil DiPofi

Tom Nakano

Karen Schott

President and CEO

EVP-Chief Administrative and

Chair of the Board

March 11, 2015

Financial Officer

March 11, 2015

financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Associationâ&#x20AC;&#x2122;s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated

INDEPENDENT AUDITORâ&#x20AC;&#x2122;S REPORT

financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

To the Board of Directors

Opinion

of Northwest Farm Credit Services , ACA and Subsidiaries

In our opinion, the consolidated financial statements referred to above present fairly, in all material We have audited the accompanying consolidated financial statements of Northwest Farm Credit

respects, the financial position of Northwest Farm Credit Services, ACA and its subsidiaries at

Services, ACA and its subsidiaries (the Association), which comprise the consolidated balance sheet

December 31, 2014, 2013 and 2012, and the results of their operations and their cash flows for

as of December 31, 2014, 2013 and 2012, and the related consolidated statements of income, of

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

comprehensive income, of changes in membersâ&#x20AC;&#x2122; equity and of cash flows for the years then ended.

States of America.

Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of

March 11, 2015

America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from

PricewaterhouseCoopers LLP, Three Embarcadero Center San Francisco, California 94111-4004

material misstatement, whether due to error or fraud.

Auditor's Responsibility Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Association's preparation and fair presentation of the consolidated

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 participates in AgDirect, LLP (AgDirect), a trade credit financing program which includes origination and re-financing of agricultural equipment loans through independent

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

equipment dealers. The program is facilitated by a limited liability partnership in which Northwest FCS is a partial owner. At December 31, 2014, Northwest FCS owned approximately 12 percent of AgDirect.

(dollars in thousands, except as noted)

NOTE 1 > Organization and Operations

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

Organization

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

partners that provide financing for agribusiness companies under the trade name, ProPartners financing programs for their customers. Upon joining ProPartners, Northwest FCS became a

Northwest Farm Credit Services, ACA and its subsidiaries, Northwest Farm Credit Services, FLCA

participant in 25.75 percent of future loan volume. ProPartners is directed by representatives from

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

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

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

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

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

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

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

The Farm Credit Administration (FCA) is delegated authority by Congress to regulate the System

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

banks and associations. The FCA examines the activities of System institutions to ensure their

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

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

to meet the credit needs of American agriculture and rural America and is subject to the provisions of the Farm Credit Act of 1971, as amended (the Farm Credit Act). At January 1, 2015, the System

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

was comprised of three Farm Credit Banks, one Agricultural Credit Bank and 76 associations.

Corporation) to administer the Farm Credit Insurance Fund (Insurance Fund). By law, the Insurance Fund is required to be used (1) to ensure the timely payment of principal and interest

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

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

service corporation, are referred to as the District. CoBank provides the funding to associations

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

within the District and is responsible for supervising certain activities of the District associations. As

discretionary use by the Insurance Corporation in providing assistance to certain troubled System

of January 1, 2015, the District consists of CoBank and 25 Agricultural Credit Associations (ACA),

institutions and to cover the operating expenses of the Insurance Corporation. Each System bank

each having two wholly owned subsidiaries, (an FLCA and a PCA), one FLCA and AgVantis.

is required to pay premiums, which may be passed on as an expense to the associations, into the Insurance Fund based on its annual average outstanding insured debt adjusted to reflect the

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

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

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

in the Insurance Fund reach the “secure base amount”, which is defined in the Farm Credit Act as

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

2 percent of the aggregate Insured Debt or such other percentage of the aggregate obligations as

purposes.

the Insurance Corporation, in its sole discretion, determines to be actuarially sound. When the amount in the Insurance Fund exceeds the secure base amount, the Insurance Corporation is

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

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

(FPI), a dedicated service corporation that provides information technology solutions for various

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

Farm Credit entities. At December 31, 2014, Northwest FCS owned 25 percent of FPI.

funds above the secure base amount to System institutions. CoBank 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 CoBank.

In May 2014, the FASB issued guidance, “Revenue from Contracts with Customers.” The guidance governs revenue recognition from contracts with customers and requires an entity to recognize

Operations

revenue to depict the transfer of promised goods or services to customers in an amount that

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

reflects the consideration to which the entity expects to be entitled in exchange for those goods or

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

services. Financial instruments and other contractual rights within the scope of other guidance

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

issued by the FASB are excluded from the scope of this new revenue recognition guidance. In this

services to eligible customers. Eligible customers include American farmers, ranchers, producers or

regard, a majority of our contracts would be excluded from the scope of this new guidance. The

harvesters of aquatic products, rural residents and farm-related businesses.

guidance becomes effective for public entities the first interim reporting period within the annual reporting periods after December 15, 2016 and for nonpublic entities the first interim reporting

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

period within the annual reporting periods after December 15, 2017. Northwest FCS is in the

hail crop insurance and provides additional services to customers such as fee appraisals and

process of reviewing contracts to determine the effect, if any, on its financial condition or results of

business management services.

operations.

Northwest FCS’ financial condition may be impacted by factors that affect CoBank. The CoBank

Significant Accounting Policies

Annual Report is available free of charge on CoBank’s website, www.cobank.com; or may be

Cash

obtained at no charge by contacting Northwest FCS, P.O. Box 2515, Spokane, Washington 99220-

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

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

financial institutions.

Northwest FCS office location. Upon request, stockholders of Northwest FCS will be provided with a copy of the CoBank Annual Report, which discusses the material aspects of its financial condition,

Investment Securities

changes in financial condition, and results of operations.

Northwest FCS may hold investments in accordance with mission-related investment and other investment programs approved by the Farm Credit Administration. These programs allow

NOTE 2 > Summary of Significant Accounting Policies

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

The accounting and reporting policies of Northwest FCS conform to accounting principles generally

Mission-related investments for which Northwest FCS has the intent and ability to hold to maturity

accepted in the United States of America (GAAP) and prevailing practices within the financial

are classified as held-to-maturity and carried at cost, adjusted for the amortization of premiums

services industry. The preparation of financial statements in conformity with GAAP requires

and accretion of discounts.

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

Loans and Allow ance for Credit Losses

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

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

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

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

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

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

have been eliminated in consolidation.

at their principal amount outstanding adjusted for charge-offs, deferred loan fees or costs, and purchase premiums or discounts. Interest on loans is accrued and credited to interest income based upon the daily principal amount outstanding. Loan origination fees and direct loan

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

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

related loan as an adjustment to yield.

contractual indebtedness of the borrower.

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

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

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

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

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

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

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

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

interest. A loan is considered contractually past due when any principal repayment or interest

are sold following accounting requirements for sale treatment.

payment required by the loan instrument is not received on or before the due date. A loan shall remain contractually past due until it is formally restructured or until the entire amount past due,

Northwest FCS uses a two-dimensional loan rating model that incorporates a 14-point scale to

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

identify and track the probability of borrower default and a separate scale addressing loss given

is collected or otherwise discharged in full.

default over a period of time. Probability of default is the probability that a borrower will

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

default is considered to have occurred if the lender believes the borrower will not be able to pay its

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

obligation in full or the borrower is past due more than 90 days. The loss given default is

indicate that collection of principal and/or interest is in doubt. When a loan is placed in nonaccrual

management’s estimate as to the anticipated economic loss on a specific loan assuming default

status, accrued interest deemed uncollectible is reversed (if accrued in the current year) and/or

has occurred, or is expected to occur within the next 12 months.

experience a default within 12 months from the date of the determination of the risk rating. A

charged against the allowance for loan losses (if accrued in the prior year). Loans are charged off Each of the probability of default categories carries a distinct likelihood of default. The 14-point

at the time they are determined to be uncollectible.

scale provides for granularity of the probability of default, especially in the acceptable ratings. A restructured loan constitutes a troubled debt restructuring if for economic or legal reasons

There are nine acceptable categories that range from a loan of the highest quality to a loan of

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

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

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

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

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

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

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

significantly as a loan moves to a substandard level (11). A substandard rating indicates that the probability of default is high.

When loans are in nonaccrual status, loan payments are generally applied against the recorded nonaccrual balance. A nonaccrual loan may, at times, be maintained on a cash basis. As a cash

The credit risk rating methodology is a key component of Northwest FCS’ allowance for loan losses

basis nonaccrual loan, the recognition of interest income from cash payments received is allowed

evaluation, and is generally incorporated into its loan underwriting standards and internal lending

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

limits. The allowance is increased through provisions for loan losses and loan recoveries and is

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

decreased through reversals of provisions for loan losses and loan charge-offs. The allowance for

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

loan losses is maintained at a level considered adequate by management to provide for probable

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

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

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

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

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

economic conditions, loan portfolio composition, collateral value, portfolio quality, current production conditions, and prior loan loss experience. The allowance for loan losses encompasses

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

Other Property Ow ned

security that, by their nature, contain elements of uncertainty, imprecision and variability. Changes

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

in the agricultural economy and environment, and their impact on borrower repayment capacity,

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

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

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

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

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

circumstances. Management considers the following factors in determining and supporting the

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

level of allowance for loan losses: the concentration of lending in agriculture, customer

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

concentration, combined with uncertainties associated with farmland values, commodity prices,

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

exports, government assistance programs, regional economic effects and weather-related

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

influences.

Consolidated Statement of Income.

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

P rem ises and Equipm ent

and loans collectively evaluated for impairment. Generally, loans individually evaluated in the

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

allowance for loan losses represent the difference between the recorded investment in the loan

Depreciation is provided on the straight-line method over the estimated useful lives of the assets.

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

Estimated useful lives are as follows: buildings are 40 years, improvements and leaseholds are the

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

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

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

is not depreciated. Gains and losses on dispositions are reflected in current operating results.

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

Maintenance and repairs are charged to operating expense and significant improvements are capitalized. Leased property meeting certain criteria is capitalized and depreciated using the

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

straight-line method over the terms of the respective leases.

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

Advanced Conditional P aym ents

contingency. The reserve for unfunded lending commitments is increased through provisions for

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

unfunded lending commitments and is decreased through reversals of provisions for unfunded

borrowers, which are classified within Advance conditional payments and other interest-bearing

lending commitments.

liabilities on the Consolidated Balance Sheet. Advanced conditional payments are not insured. Interest is paid by Northwest FCS on such accounts.

Investment in CoBank, ACB Northwest FCS' required investment in CoBank is in the form of Class A stock with a par value of

Em ployee Benefit P lans

$100 per share. The minimum required investment is 4 percent of Northwest FCS’ prior year’s

Substantially all employees of Northwest FCS participate in the Farm Credit Foundations Defined

average direct loan volume. In addition, Northwest FCS is required to capitalize its patronage-

Contribution/401(k) Retirement Plan (Defined Contribution Plan) or the Defined Benefit Pension

based participation loans sold to CoBank at 8 percent of Northwest FCS’ prior ten-year average

Plan (Pension Plan). Enrollment in the Pension Plan was curtailed in 1994. Existing employees who

balance of such participations sold to CoBank. The investment in CoBank is comprised of stock

elected to transfer out of the Pension Plan and all new employees hired after December 31, 1994,

received as patronage and purchased stock. Accounting for this investment is on the cost plus

participate in the Defined Contribution Plan. The Pension Plan uses the “Entry Age Normal Cost”

allocated equities basis. Northwest FCS owned approximately 12 percent of the outstanding

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

common stock of CoBank at December 31, 2014.

financial reporting purposes.

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

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

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

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

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

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

(IRC) to which Northwest FCS matches a certain percentage of employee contributions. Defined

expected patronage program, which reduces taxable earnings.

contribution costs are expensed in the same period that participants earn employer contributions Deferred income taxes have not been provided by Northwest FCS on stock patronage distributions

and employer matching costs are expensed as funded.

received from the Bank prior to January 1, 1993, the adoption date of the FASB guidance on Certain management or highly compensated employees who participate in the Pension Plan also

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

participate in a nonqualified Northwest FCS Defined Benefit Restoration Plan (Restoration Plan).

earnings in the Bank, or if converted to cash, to pass through any distribution related to pre-1993

Each eligible employee whose retirement benefit under the Pension Plan is limited by IRC Sections

earnings to Northwest FCS’ stockholders through qualified patronage allocations. Northwest FCS

401(a) (17), 415, or any Code provision or government regulations subsequently issued, will

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

receive a benefit if these programs are continued. Under the present plan, the monthly benefit is

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

equal to the difference between the participant’s actual monthly retirement benefit payment under

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

the Pension Plan and the monthly retirement benefit payment that would be payable to the

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

participant under the Pension Plan if the limitations of IRC Sections 401(a) (17), 415, or any code

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

provision or government regulations subsequently issued, did not apply.

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

Incom e Tax es

P atronage Distributions from CoBank, ACB

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

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

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

CoBank capital plan, they distribute patronage from Northwest FCS’ direct lending business in

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

cash. For patronage applicable to participations sold to CoBank, patronage is distributed in 75

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

percent cash and 25 percent Class A stock. Accrued patronage is included in Other assets on the

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

Consolidated Balance Sheet.

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

Derivative Instrum ents and Hedging Activity

income taxes in Idaho, Oregon and Montana. Both entities currently operate as cooperatives that

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

qualify for tax treatment under Subchapter T of the IRC. Accordingly, under specified conditions,

are principally used to manage interest rate and foreign currency exchange rate risk on assets.

they can exclude from taxable income amounts distributed as qualified patronage refunds in the

Derivatives are recorded on the Consolidated Balance Sheet as Other assets and Other liabilities at

form of cash, stock, or allocated surplus. Provisions for income taxes are made only on those

fair value.

earnings that will not be distributed as qualified patronage refunds. Changes in the fair value of derivatives are recorded in current period earnings or accumulated Northwest FCS accounts for income taxes under the liability method. Accordingly, deferred taxes

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

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

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

taxes. Deferred taxes are recorded on the tax effect of all temporary differences based on the

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

assumption that such temporary differences are retained by Northwest FCS and will therefore

earnings and will generally be offset by changes in the hedged item’s fair value. For cash-flow

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

hedge transactions, in which Northwest FCS is hedging the variability of future cash flows related

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

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

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

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

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

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

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

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

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

are observable in the marketplace.

hedges is recorded in current period earnings. For derivatives not designated as a hedging 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 for the asset or liability either directly or indirectly. Level 2 inputs include the following: (a) quoted

Northwest FCS formally documents all relationships between hedging instruments and hedged

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

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

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

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

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

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

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

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

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

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

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

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

plan assets that are derived from observable inputs are reported in Level 2. This category includes

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

derivative contracts.

Northwest FCS’ current derivative transactions, management has no reason to believe that hedge accounting qualifications will not be met and believes the transactions will continue to be recorded

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

in the manner described in Note 16 of these Consolidated Financial Statements.

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

Other Com prehensive Incom e (Loss)

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

reporting entity’s own assumptions about factors that market participants would use in pricing the determined using pricing models, discounted cash flow methodologies, or similar techniques, as

Other comprehensive income (loss) is a measure of all changes in the equity of Northwest FCS as

well as instruments for which the determination of fair value requires significant management

a result of recognized transactions and other economic events of the period other than capital

judgment or estimation. This category generally includes nonaccrual loans, investments in system

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

entities, other property owned, notes payable and standby letters of credit. Pension Plan assets

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

that are supported by little or no market data in determining the fair value are included in Level 3.

comprehensive income but are excluded from net income. Other comprehensive income (loss) is comprised of adjustments related to Northwest FCS’ Pension Plan and Restoration Plan as well as

The fair value disclosures are presented in Note 11 and Note 14.

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

Off-Balance Sheet Credit Ex posures Commitments to extend credit are agreements to lend to customers. The commitments generally

Fair Value M easurem ents

have fixed expiration dates or other termination clauses that may require payment of a fee.

Accounting guidance defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. It describes three levels of inputs that may be

Commercial letters of credit are conditional commitments issued to guarantee the performance of

used to measure fair value:

a customer to a third party. These letters of credit are issued to facilitate commerce and typically result in the commitment being funded when the underlying transaction is consummated between the customer and third party. The credit risk associated with commitments to extend credit and

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

Northwest FCS may purchase or sell loan participation interests with other parties to diversify risk,

customers and is subject to normal credit policies. Collateral may be obtained based on

manage loan volume and comply with FCA regulations. The following table presents information

managementâ&#x20AC;&#x2122;s assessment of the customerâ&#x20AC;&#x2122;s creditworthiness.

regarding participations purchased and sold as of December 31, 2014, 2013 and 2012. Participations purchased volume in the table excludes syndications and purchases of other

NOTE 3 > Loans and Allowance for Credit Losses

interests in loans:

Northwest FCSâ&#x20AC;&#x2122; portfolio is comprised of a wide array of commodities and product offerings. Northwest FCS has specialized staff and has tailored financial products to effectively serve these diversified markets. A summary of loans follows:

•

Northwest FCS' concentration of credit risk in various agricultural commodities and industries is shown in the following table. While the amounts represent Northwest FCS' maximum potential

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

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

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

accordingly. An estimate of the current loss exposure is considered in the determination of the

full highly questionable.

allowance for loan losses in the consolidated financial statements. •

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 by loan type:

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 related to impaired loans, including accrued interest, where applicable:

Commitments to lend additional funds to debtors whose loans were classified as impaired at December 31, 2014, 2013 and 2012 totaled $1,076, $6,648 and $8,447, respectively.

Additional impaired loan information, including related accrued interest where applicable, as of December 31, 2014, 2013 and 2012 is 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, 2014 and 2013, is the result of the recognition of interest income contractually due in prior periods. The following tables provide an aging analysis of past due loans and accrued interest:

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:

During 2014, troubled debt restructurings that occurred within the previous 12 months and for which there was a subsequent payment default during the period totaled $238, which was classified as production and intermediate loans. 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. Additional commitments to lend to borrowers whose loans have been modified in troubled debt restructurings was $1,072 at December 31, 2014.

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.

The following table provides information on outstanding loans restructured in troubled debt restructurings (TDRs) as of December 31 2014, 2013 and 2012. These loans are included as

A restructuring of a debt constitutes a troubled debt restructuring if the creditor, for economic or

impaired loans in the impaired loans table.

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 occurred during the years ended December 31, 2014, 2013 and 2012:

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.

Summaries of the changes in the allowance for loan losses and the ending balance of loans and accrued interest outstanding as of December 31, 2014, 2013 and 2012 are as follows:

2007 LLC

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

Pursuant to the credit default swap, following the occurrence of a known loss, the 2007 LLC will be required to pay an amount to Northwest FCS equal to the principal amount of the defaulted loan plus covered interest and costs less any recoveries. No payment is due to Northwest FCS until 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 During 2007, 2004 and 2002, Northwest FCS entered into credit default swaps with Mt. Spokane

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

2007-A LLC (2007 LLC), Mt. Spokane 2004-A LLC (2004 LLC), and Mt. Spokane Trust 2002-A

as repayment of loan principal. As of December 31, 2014, the balance of the Retained First Loss

(Trust), respectively, for credit enhancement purposes. Each of the agreements could remain in

Notional Amount was $1,862. The maximum amount of losses the 2007 LLC will be required to pay

place over the life of the loans under the swap agreement; however, Northwest FCS has the right

under the credit default swap was $12,099 and losses incurred by Northwest FCS have been $233.

to redeem any of the agreements once the outstanding balance is below 10 percent of the original balance. Fees are paid accordingly based on the volume of the loans under the agreements. The

2004 LLC

following discussion provides the key provisions of each of the agreements.

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 plus covered interest and costs less any recoveries. As of December 31, 2014, the maximum amount of losses the 2004 LLC will be required to pay under the credit default swap was $7,865 and losses incurred by the 2004 LLC have been $259.

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. The impacts of unwinding this transaction to

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

Northwest FCS’ financial position, capital ratios and credit quality were minimal.

in Section 7701(i) of the IRC and the accompanying United States Treasury 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 Northwest FCS is required to own stock in CoBank to capitalize its direct loan balance and participation loans 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. Northwest FCS owned approximately 12 percent of the issued stock of CoBank at December 31, 2014. As of that date, CoBank's assets totaled $107,428,401 and members' equity totaled $7,369,663. CoBank's earnings were $904,270 during 2014. CoBank may require the holders of its equities to subscribe for such additional capital as may be needed to meet its capital requirements or its joint and several liability under the Act and regulations. In making such a capital call, CoBank shall take into account the financial condition of each such holder and such other considerations, as it deems appropriate.

Trust and 2004 LLC are variable interest entities created by Bank of America to acquire eligible securities, which will be used as collateral to secure the Failure to Pay Credit Event payment of the

NOTE 5 > Premises and Equipment

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

Premises and equipment consist of the following:

form of direct obligations of, and obligations fully guaranteed as to timely payment of principal and 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 which are backed by the full faith and credit of the United States of America. 2007 LLC is also a variable interest entity created by Lehman Brothers to acquire eligible securities, which will be used as collateral to secure the Failure to Pay Credit Event payment of the 2007 LLC under a credit default swap with Northwest FCS. The bankruptcy of Lehman Brothers in 2008 did 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

During the year ended December 31, 2014, Northwest FCS purchased land and a building to use

assets have no recorded value on the Consolidated Balance Sheet. Income earned on these

as its headquarters for $9,010. Northwest FCS’ current headquarters location lease expires in 2017

mineral rights for the years ended December 31, 2014, 2013 and 2012 was $8,691, $7,765 and

and expects to move into the new facility after renovations are completed.

$6,420 respectively and is included in Other income on the Consolidated Statement of Income.

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

NOTE 7 > Note Payable to CoBank, ACB

Rental expense under these operating leases was $7,101, $6,687 and $6,403 for the years ended

Northwest FCS’ indebtedness to CoBank represents borrowings by Northwest FCS to fund its loan

December 31, 2014, 2013 and 2012, respectively.

portfolio. This indebtedness is collateralized by a pledge of substantially all of Northwest FCS’ assets and is governed by a General Financing Agreement (GFA). The GFA and other term

At December 31, 2014, future minimum lease payments for leases are as follows:

structures available to Northwest 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, 2014. The weighted average interest rate for all debt was 1.44, 1.59 and 1.66 percent at December 31, 2014, 2013 and 2012, respectively. The GFA will expire on May 31, 2018 and management expects renewal of the GFA at that time. Through the Note payable to CoBank, Northwest FCS is liable for the following:

The capital lease payments in the above table include $583 of interest; the total present value of minimum capital lease payments at December 31, 2014 is $1,481. The total cost of buildings under capital leases was $1,911 as of December 2014, 2013 and 2012, and accumulated depreciation was $601, $411 and $222, respectively, as of December 2014, 2013 and 2012. Fixed rate debt typically has original maturities ranging from 1 to 30 years. Floating rate notes

NOTE 6 > Other Property Owned

generally have maturities ranging from 1 month to 5 years. Discount notes have maturities from

Net (gains) losses on Other property owned consist of the following:

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

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

The maturities of debt within the Note payable to CoBank as of December 31, 2014 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 percent of the related loan balance.

At December 31, 2014, callable debt was $806,000, with a range of call dates between January 2015 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. The Northwest FCS' Board of Directors (the board) considers the current and future

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

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

relating primarily to credit quality and financial condition. At December 31, 2014, Northwest FCS’

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

note payable is within the specified limitations.

requirements, 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

2014 and 2013, no balance was outstanding on this line of credit. Additionally, until December

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

2012, Northwest FCS had a letter of credit facility with Bank of America to support letters of credit

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

issued 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, 2014, 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 The FCA's capital adequacy regulations require Northwest FCS to maintain permanent capital of 7

Capital Stock and Participation Certificates

percent of average risk-adjusted assets and off-balance-sheet commitments. Failure to meet this

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

requirement can initiate certain mandatory and possibly additional discretionary actions by the FCA

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

that, if undertaken, could have a direct material effect on Northwest FCS’ financial statements.

capital stock or participation certificates at the time the loan is made but usually do not make a

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

cash investment. Effective November 19, 2012, the aggregate par value of the stock is treated as a

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

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

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

standards require all System institutions to achieve and maintain ratios of total surplus as a

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

percentage of risk-adjusted assets of 7 percent and of core surplus (generally unallocated retained

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

earnings) as a percentage of risk-adjusted assets of 3.5 percent. Northwest FCSâ&#x20AC;&#x2122; permanent

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

capital, core surplus and total surplus ratios at December 31, 2014, were 15.5 percent, 15.4

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

percent and 15.4 percent, respectively. Management is not aware of any reasons why Northwest

participation certificates provide no voting rights to their owners. Voting stock may not be

FCSâ&#x20AC;&#x2122; regulatory capital requirements would not be met in 2015, nor is it currently prohibited from

transferred to another person unless such person is eligible to hold such stock.

retiring stock or distributing earnings or expected to be in 2015. Losses that result in impairment of capital stock and PCs would be allocated to such equities on a An existing regulation empowers FCA to direct a transfer of funds or equities by one or more

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

System institutions to another System institution under specified circumstances. This regulation

certificates would be utilized as necessary to satisfy any remaining obligations in excess of the

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

amounts realized on the sale or liquidation of assets. Equities protected under the Farm Credit Act

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

would continue to be retired at par or face value.

Description of Equities

Patronage

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

Northwest FCSâ&#x20AC;&#x2122; bylaws provide for the payment of patronage distributions. All patronage

up to 500 million units of Class A participation certificates (PCs) with a par value of 5 dollars per

distributions to eligible stockholders shall be on a proportionate patronage basis as may be

share. Class B PCs with a par value of 5 dollars per share are no longer being issued, and all were

approved by the board, consistent with the requirements of Subchapter T of the IRC. For the years

retired as of December 31, 2011.

ending December 31, 2014, 2013 and 2012, the board approved cash patronage distributions of $64,134, $58,134 and $55,245, respectively. Patronage distributions are recorded on an accrual

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

basis, based on estimated amounts. The difference between the estimated accrual and the actual

board and, if retired, shall be retired at its book value, not to exceed its par value. At December

patronage distribution is reflected in retained earnings in the year paid. In December 2014, the

31, 2014, there were 2,450,962 shares outstanding with a total par value of $12,255.

board approved a resolution to distribute a portion of 2015 earnings in the form of patronage dividends to its stockholders. The patronage dividend will be accrued in 2015 and declared and

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

paid in 2016.

of the board and, if retired, shall be retired at its book value, not to exceed its par value. At December 31, 2014, there were 88,082 units outstanding with a total par value of $440.

All earnings not distributed as qualified patronage allocations or appropriated for some other purpose are retained as unallocated retained earnings. At December 31, 2014, all accumulated

Northwest FCS is authorized to issue 100 million shares of Class D Nonvoting stock to CoBank with

earnings are retained as unallocated retained earnings. In accordance with Internal Revenue

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

Service requirements, each stockholder is sent a nonqualified written notice of allocation.

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

Allocated, but not distributed patronage refunds, are included as unallocated retained earnings.

Retirement and earnings distributions are subject to statutory and regulatory restrictions. At

Such allocations may provide a future basis for a distribution of capital. The board considers these

December 31, 2014 there were no Class D Nonvoting shares outstanding.

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.

Accumulated Other Comprehensive Loss

The following table represents reclassifications out of accumulated other comprehensive (loss)

Northwest FCS reports Accumulated other comprehensive loss as a component of membersâ&#x20AC;&#x2122;

income:

equity, which is reported net of taxes as follows:

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

NOTE 9 > Patronage Distributions from Farm Credit Institutions Patronage income recognized from Farm Credit Institutions to Northwest FCS totaled $47,860, $43,490 and $42,028 for the years ended December 31, 2014, 2013 and 2012, respectively. Of this amount $40,503, $38,939 and $38,820 for the years ended December 31, 2014, 2013 and 2012, respectively, was from CoBank. Patronage distributed from CoBank was in cash and stock. The amount declared in December 2014 was accrued and will be paid by CoBank in 2015.

NOTE 10 > Income Taxes The provision for income taxes follows:

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

reversed. During 2014, Northwest FCS established a liability of $264 for an uncertain tax position

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

related to a state tax position. Northwest FCS has unrecognized tax benefits for which liabilities have been established. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Deferred tax assets and liabilities are comprised of the following: Northwest FCS recognizes interest and penalties related to unrecognized tax positions as an adjustment to income tax expense. The total amount of unrecognized tax benefits that, if recognized would have no affect on the effective tax rate. Northwest FCS does not have any positions for which it is reasonably possible that the total amounts of unrecognized tax positions will significantly increase or decrease within the next 12 months. Tax years that remain open for federal and state income tax jurisdictions are generally 2011 and forward.

NOTE 11 > Employee Benefit Plans Certain employees of Northwest FCS participate in a Pension Plan, which was most recently amended and restated effective January 1, 2014. The Farm Credit Foundations Plan Sponsor The calculation of deferred tax assets and liabilities involves various management estimates and

Committee approved amendments to the plan document primarily to address IRC requirements

assumptions as to the future taxable earnings, including the amount of non-patronage income and

and to conform provisions of the plan with administrative practices.

patronage income retained. The expected future tax rates are based upon enacted tax laws. The Department of Labor has determined the plan to be a governmental plan; therefore, the plan Northwest FCS recorded a valuation allowance of $21,330, $24,524 and $35,434 during 2014,

is not subject to the provisions of the Employee Retirement Income Security Act of 1974, as

2013 and 2012, respectively. Northwest FCS will continue to evaluate the realizability of the

amended (ERISA). As the plan is not subject to ERISA, the planâ&#x20AC;&#x2122;s benefits are not insured by the

deferred tax assets and adjust the valuation allowance accordingly.

Pension Benefit Guaranty Corporation. Accordingly, the amount of accumulated benefits that participants would receive in the event of the planâ&#x20AC;&#x2122;s termination is contingent on the sufficiency of the planâ&#x20AC;&#x2122;s net assets to provide benefits at that time.

During 2012, Northwest FCS established a liability of $1,000 for an uncertain tax position related to an Idaho state tax position. During 2013, it was determined through interactions with the Idaho

Northwest FCS contributes amounts necessary on an actuarial basis to provide the plan with

state taxing authority that the position was sustainable and as such the uncertain tax liability was

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. Benefits are paid from plan assets based upon a pre-defined formula which considers salary and credited service, subject to certain limitations. Several benefit payment options are available, as defined in the Pension Plan document. The projected benefit obligation, accumulated benefit obligation and the fair value of plan assets For a limited number of highly-compensated participants in the Pension Plan mentioned above,

for each of Northwest FCSâ&#x20AC;&#x2122; post-retirement benefit plans are presented in the following table. Each

Northwest FCS also has a Restoration Plan to restore benefits to those Pension Plan participants

of the plans has an accumulated benefit obligation in excess of plan assets in each of the periods

whose compensation or benefits exceeds the maximum allowed for a qualified pension plan per

reported:

Internal Revenue Service regulations or wages excluded from compensation in the Pension Plan due to deferrals in a nonqualified deferred compensation plan. The following tables set forth the obligations and funded status of Northwest FCSâ&#x20AC;&#x2122; Pension Plan and Restoration Plan. The funding status and the amounts recognized in the Consolidated Balance Sheet for post-retirement benefit plans follows:

The components of net periodic pension (income) cost and other amounts recognized in other comprehensive loss (income) are as follows:

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 that is designed to reduce investment risks as the funded status improves; this is achieved through a dynamically driven allocation process that measures assets and liabilities daily. To implement these policies, the plans have adopted a diversified set of portfolio management strategies to optimize the risk reward profile of the plans. Plan assets are divided into two primary component portfolios:

The estimated net loss for the Pension Plan and Restoration Plan that will be amortized from Accumulated other comprehensive loss into the net periodic benefit cost in 2015 is $1,662 and

•

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

$102, respectively. There are no remaining prior service costs in accumulated other comprehensive

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

loss as of December 31, 2014.

diversification 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

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

returns. Accordingly, the return-seeking portfolio will contain additional asset classes that are intended to diversify equity risk as well as contribute to excess return. 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

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

styles. Non U.S. equities will contain securities in both passively and actively managed

December 31:

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 (REIT) and other liquid real estate related securities and hedge fund of funds. These portfolios

The funding objective of the plans is to provide present and future retirement or survivor benefits

combine income generation and capital appreciation opportunities from developed

for its members by achieving an attractive rate of return, as defined by the plans’ policy

markets globally. Other investment strategies may be employed to gain certain market

statements, without exposing the plan to undue risks. A Board of Trustees (Trustees), called the

exposures, reduce portfolio risk and to further diversify portfolio assets.

Farm Credit Foundations Trust Committee (Trust Committee), comprised of certain members of

•

senior management of the participating employers, supervises the investment assets of the plans

A liability hedging portfolio that is primarily invested in intermediate and long-term

on behalf of the employers. The Trustees adopt an asset allocation strategy for each plan that

investment grade corporate bonds in actively managed strategies that are intended to

reflects return and risk objectives, plan liabilities, and other factors.

hedge interest rate risk. The portfolio will progressively increase in size as each plan’s funded ratio improves. The use of selected portfolio strategies incorporating derivatives

Beginning in 2014, new investment policies were implemented as approved by the Trust Committee.

may be employed to improve the liability hedging characteristics or reduce risk. There is

The new policies have incorporated a liability-based framework in which assets are managed to the

also a managed liquidity portfolio that is composed of short-term assets intended to pay

unique liabilities of each plan. The overall objectives of these policies are intended to meet the benefit

periodic plan benefits and expenses.

Portfolios are measured and monitored daily to ensure compliance with investment policies. Slight adjustments to policy allocations will be employed based on medium term views and capital market assumptions, but will remain within stated policy ranges. For 2014, the asset allocation policy of the Pension Plan provides a target of 70 percent of assets in return seeking investments and 30 percent of assets in liability hedging investments. Specifically, return seeking investments include: global equity securities, global real estate investment trust securities, hedge funds, and high yield bonds; and liability hedging investments include high quality credit debt securities. The fair values of the Pension Plan assets by asset category are as follows:

Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets would be classified as Level 1. Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with observable market data would be classified as Level 2. In addition, assets measured at Net Asset Value (NAV) per share and may be redeemed at NAV per share at the measurement date are classified as Level 2. Unobservable inputs (e.g. a companyâ&#x20AC;&#x2122;s own assumptions and data) and assets measured at NAV per share which may not be redeemed at NAV per share at the measurement date would be classified as Level 3. All assets are evaluated at the fund level. There were no significant transfers in or out of Levels 1, 2, or 3 during the year. The following table presents the expected future payments, which reflect expected future service, as appropriate, from the Pension Plan and Restoration Plan.

Northwest FCS does not expect to make contributions to the Pension Plan or Restoration Plan in 2015. Plan assets are diversified into various investment types as shown in the preceding table. An

Employees not eligible to participate in the Pension Plan participate in the Defined Contribution

investment consultant is utilized to ensure the diversification of assets. The assets are spread

Plan, which is in accordance with Section 401 of the IRC. The Defined Contribution Plan requires

among numerous fund managers. Diversification is also obtained by selecting fund managers

the employer to contribute 3 percent of eligible employee compensation for eligible employees. For

whose funds are not concentrated in individual stocks and, for the case of international funds,

eligible employees hired prior to January 1, 2007, up to an additional 5 percent of compensation in

individual countries.

excess of the employee social security wage base is available. The Defined Contribution Plan expense recorded by Northwest FCS was $1,698, $1,682 and $1,546, in 2014, 2013 and 2012,

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

respectively.

Coordinating Committee (Coordinating Committee) with input from the Trust Committee. Historical return information is used to establish a best-estimate range for each asset class in which the

All Northwest FCS employees may elect to defer a portion of their salaries in accordance with

plans are invested. The most appropriate rate is selected from the best-estimate range, taking into

Internal Revenue Service rules. For employees participating in the Pension Plan, Northwest FCS

consideration the duration of plan benefit liabilities and Coordinating Committee investment

matches employee contributions up to a maximum of 100 percent of the employeesâ&#x20AC;&#x2122; first 2 percent

policies.

of eligible earnings and 50 percent on the next 4 percent of eligible earnings. For employees

participating in the Defined Contribution Plan, Northwest FCS matches employee contributions up

In the normal course of business Northwest FCS purchases loan participations from CoBank and

to a maximum of 100 percent on the employees’ first 6 percent of eligible earnings. Employer

also sells loan participations to CoBank. At December 31, 2014, Northwest FCS had sold

matching contributions were $3,420, $3,140 and $2,297 for the years ended December 31, 2014,

participation interests to CoBank totaling $1,377,434 and had purchased loan participation

2013 and 2012, respectively.

interests from CoBank totaling $897,931.

NOTE 12 > Related Party Transactions

During 2010, Northwest FCS provided a limited recourse collection guaranty to CoBank covering

In the ordinary course of business, Northwest FCS enters into loan transactions with directors,

four participated loans. The remaining balances on the loans were $5,135 as of December 31,

their immediate families, their affiliated organizations and affiliated organizations of senior officers.

2012. There were no remaining balances on these loans at December 31, 2014 or 2013. There

Such loans are made on the same terms, including interest rates, amortization schedules and

were no unfunded lending commitments as of December 31, 2014, 2013 or 2012. Pursuant to the

collateral requirements, as those prevailing at the time for comparable transactions with unrelated

terms of the transaction, Northwest FCS guaranteed collection of 20 percent of the outstanding

borrowers. Senior officers and their immediate families are precluded from obtaining loans from

balance of the loans over their respective remaining terms.

Northwest FCS. The investment in FPI was $2,682 as of December 31, 2014, which was included in Other assets on the Consolidated Balance Sheet. The total cost of services purchased from FPI for the years

Loan information to related parties for the years ended December 31 is shown below:

ended December 31, 2014, 2013 and 2012 were $11,977, $14,373 and $11,777, respectively, which are included within Other operating expenses on the Consolidated Statement of Income. As of December 31, 2014, Northwest FCS’ investment in AgDirect was $21,226, which was included in Other assets on the Consolidated Balance Sheet. Income recorded related to AgDirect for the years ended December 31, 2014, 2013 and 2012 were $2,305, $753 and $0, respectively, which are included within Other income on the Consolidated Statement of Income.

The repayments and other above reflects changes in related parties for the respective periods. In the opinion of management, none of these loans outstanding at December 31, 2014 involved

As of December 31, 2014, Northwest FCS’ investment in Farm Credit Foundations (Foundations)

more than a normal risk of collectability.

was $80, which was included in Other assets on the Consolidated Balance Sheet. Foundations provides human resource information systems, benefit, payroll, and workforce management

In the ordinary course of business, Northwest FCS enters into certain other transactions with

services. The total cost of services purchased from Foundations for the years ended December 31,

directors and their affiliated entities. These transactions for products and services are available to

2014, 2013 and 2012 were $557, $540 and $495, respectively, which are included within Other

all customers and are made on the same terms prevailing at the time for comparable transactions

operating expenses on the Consolidated Statement of Income.

with unrelated customers.

As of December 31, 2014, Northwest FCS had a 25.75 percent participation interest in ProPartners

Northwest FCS also recognized $40,503, $38,939 and $38,820 of patronage income from CoBank

loans originated after September 1, 2012, resulting in $272,556 included in Loans on the

for the years ended December 31, 2014, 2013 and 2012, respectively. As of December 31, 2014,

Consolidated Balance Sheet. Expenses recorded related to ProPartners for the years ended

Northwest FCS’ investment in CoBank was $322,358, which is included in Assets on the

December 31, 2014, 2013 and 2012 were $3,688, $2,708 and $356, respectively, which are

Consolidated Balance Sheet.

included within Other operating expenses on the Consolidated Statement of Income.

As of December 31, 2014, Northwest FCS had equity ownerships in the following Unincorporated Business Entities, which were all formed for the purpose of acquiring and managing unusual or complex collateral associated with loans.

NOTE 13 > Regulatory Enforcement Matters No FCA regulatory enforcement actions currently exist with respect to Northwest FCS.

NOTE 14 > Fair Value of Financial Instruments Accounting guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. See Note 2 for additional information. Assets and liabilities measured at fair value on a recurring basis at December 31, 2014, 2013 and 2012, for each of the fair value hierarchy values are summarized in the following tables: The table below represents reconciliations of all Level 3 liabilities measured at fair value on a recurring basis for the years ended December 31, 2014, 2013 and 2012:

Valuation Techniques As more fully discussed in Note 2, accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following represents a brief summary of the valuation techniques used by Northwest FCS for assets and liabilities. There were no significant transfers between Level 1, Level 2 and Level 3 during the year.

Assets Held in Non-Qualified Trusts

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2014, 2013

Assets held in trust funds related to deferred compensation and supplemental retirement plans are

and 2012, for each of the fair value hierarchy values are summarized in the following table:

classified within Level 1. The trust funds include investments that are actively traded and have quoted net asset values that are observable in the marketplace.

Loans Fair value is estimated by discounting the expected future cash flows using Northwest FCSâ&#x20AC;&#x2122; current interest rates at which similar loans would be made or repriced to borrowers with similar credit 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 estimated fair values presented would be indicative of the assumptions and adjustments that a purchaser of the loans would seek in an actual sale, which could be less. The next table presents the carrying amounts and estimated fair values of Northwest FCSâ&#x20AC;&#x2122; financial

For purposes of determining fair value of accruing loans, the loan portfolio is segregated into pools

instruments:

of loans with homogeneous characteristics. Expected future cash flows and interest rates reflecting appropriate credit risk are separately determined for each individual pool. For nonaccrual loans, it is assumed that collection will result only from the disposition of the underlying collateral. Fair value of these loans is estimated to equal the aggregate net realizable 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 fair value. Loans shown in the table above are valued within the fair value Level 3 hierarchy. Allowance for Loan Losses As discussed in Note 2, the allowance for loan losses represents an estimate of the credit risk in Northwest FCS' loan portfolio. Because the discount rate used to adjust the carrying value of each loan pool to its fair value reflects the credit risk in the loan portfolio, the allowance for loan losses

is not considered necessary in determining the fair value of Northwest FCS' financial instruments.

The models used to determine the fair value of derivative assets and liabilities use an income

The allowance for loan losses shown in the table above is valued within the fair value Level 3

statement approach based on observable market inputs, primarily the LIBOR swap curve and

hierarchy.

volatility assumptions about future interest rate movements.

Other Property Owned

Standby Letters of Credit

The process for measuring the fair value of Other property owned involves the use of appraisals or

The fair value of standby letters of credit is based on fees currently charged for similar agreements

other market-based information. Costs to sell represent transaction costs and are not included as a

or the estimated cost to terminate or otherwise settle similar obligations. The standby letters of

component of the assetâ&#x20AC;&#x2122;s fair value. As a result, these fair value measurements fall within Level 3

credit shown in the table above is valued within the fair value Level 3 hierarchy.

of the hierarchy.

NOTE 15 > Commitments and Contingencies Northwest FCS has various commitments outstanding and contingent liabilities.

Investment in System Entities Northwest FCS has investments in other System entities including, but not limited, to CoBank,

Northwest FCS may participate in financial instruments with off-balance-sheet risk to satisfy the

AgDirect and FPI, as discussed in Note 12. Estimating the fair value of Northwest FCS investments

financing needs of its customers and to manage their exposure to interest-rate risk. These financial

in System entities is not practicable because the investments are not traded. The investment in

instruments include commitments to extend credit and/or commercial letters of credit. The

System entities shown above is valued within the fair value Level 3 hierarchy.

instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the financial statements. Commitments to extend credit are agreements to lend to a customer

Note Payable to CoBank, ACB

as long as there is not a violation of any condition established in the contract. Commercial letters

Notes payable are not all regularly traded in the secondary market and those that are traded may

of credit are agreements to pay a beneficiary under conditions specified in the letter of credit.

not have readily available quoted market prices. Therefore, the fair value of the majority of

Commitments and letters of credit generally have fixed expiration dates or other termination

instruments is estimated by calculating the discounted value of the expected future cash flows. To

clauses and may require payment of a fee. At December 31, 2014, there was $3,760,511 of

the extent that quoted market prices on like instruments are available, the fair value of these

commitments to extend credit.

instruments is estimated by discounting expected future cash flows based on the quoted market price of similar maturity U.S. Treasury notes, assuming a constant estimated yield spread

Since many of these commitments are expected to expire without being drawn upon, the total

relationship between Systemwide bonds, notes and comparable U.S. Treasury notes. The note

commitments do not necessarily represent future cash requirements. However, these credit-related

payable to CoBank shown in the table above is valued within the fair value Level 3 hierarchy.

financial instruments have off-balance-sheet credit risk because their amounts are not reflected on

Advance Conditional Payments

the same as that involved in extending loans to borrowers and management applies the same

The carrying value is a reasonable estimate of fair value as these funds are held in cash.

credit policies to these commitments. Upon fully funding a commitment, the credit risk amounts

the balance sheet until funded. The credit risk associated with issuing commitments is substantially

are equal to the contract amounts, assuming that borrowers fail completely to meet their

Derivative Assets and Liabilities

obligations and the collateral or other security is of no value. The amount of collateral obtained, if

Exchange-traded derivatives valued using quoted prices would be classified within Level 1 of the

deemed necessary upon extension of credit, is based on managementâ&#x20AC;&#x2122;s credit evaluation of the

valuation hierarchy. However, few classes of derivative contracts are listed on an exchange; thus,

borrower.

the derivative positions are valued using internally developed models that use as their basis readily observable market parameters and are classified within Level 2 of the valuation hierarchy. Such derivatives include interest rate and foreign currency cash flow hedges.

By using derivative instruments, Northwest FCS exposes itself to credit risk and market risk.

Northwest FCS also participates in standby letters of credit to satisfy the financing needs of its borrowers. These letters of credit are irrevocable agreements to guarantee payments of specified

Generally, when the fair value of a derivative contract is positive, this indicates that the

financial obligations. Standby letters of credit are recorded at fair value on the Consolidated

counterparty owes Northwest FCS, thus creating a performance risk for Northwest FCS. When the

Balance Sheet. At December 31, 2014, $92,829 of standby letters of credit were outstanding. The

fair value of the derivative contract is negative, Northwest FCS owes the counterparty and,

standby letters of credit typically have expiration dates of one year or less.

therefore assumes no performance risk. Northwest FCS’ derivative activities are monitored by the ALCO as part of the Committee’s oversight of the asset/liability and treasury functions. The

Northwest FCS maintains a contingency reserve for unfunded lending commitments, which reflects

Committee is responsible for approving hedging strategies that are developed within parameters

our best estimate of losses inherent in lending commitments made to customers but not yet

established by the board. The resulting hedging strategies are then incorporated into Northwest

disbursed upon. The reserve totaled $27,000, $15,000 and $12,000 for the years ended December

FCS’ overall risk-management strategies.

31, 2014, 2013 and 2012, respectively. Northwest FCS has purchased an interest rate cap from CoBank to hedge the potential impact of At December 31, 2012, Northwest FCS had a contingent liability of $3,000 related to a revenue

rising interest rates on our floating-rate debt. If the strike rate of the purchased interest rate cap is

tax. During 2013, Northwest FCS completed managed audit proceedings with the taxing authority

exceeded, Northwest FCS will receive cash flows on the derivative to hedge our floating-rate

and obtained a resolution of amounts potentially owed for periods open within the statute of

funding exposure above such strike levels. The interest rate cap is accounted for as a cash-flow

limitations. The resolution resulted in Northwest FCS making a net payment of $1,362 to the taxing

hedge. The interest rate cap has a notional amount of $73,000, and was purchased at a trade-date

authority. The reversal of the remaining previously recorded liability of $1,638 is included as a

fair value of $1,500.

reduction to Other expense in the 2013 Consolidated Statement of Income. Northwest FCS also uses foreign exchange forward positions to “lock in” a desired cash flow on In addition, actions are pending against Northwest FCS in which claims for monetary damages are

foreign currency denominated loans. The specific terms and amounts of the forwards are

asserted. Based on current information, management and legal counsel are of the opinion that the

determined based on the known cash flows on the loans. Each cash flow is hedged via a separate

ultimate liability, if any resulting there from, would not be material in relation to the financial

foreign exchange forward sale as it arises.

position and results of operation of Northwest FCS. The following table presents the estimated fair values of Northwest FCS’ derivative instruments

NOTE 16 > Derivative Instruments and Hedging Activities

and corresponding balances in accumulated other comprehensive (loss) income:

Northwest FCS maintains an overall risk management strategy that incorporates the use of derivative financial instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. Our goal is to manage interest rate sensitivity by modifying the 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 and foreign exchange rate fluctuations, fixed rate assets and liabilities will appreciate or depreciate

See Note 8 and Note 14 for additional information on derivative instruments.

in market value. The effect of this variability in earnings is expected to be substantially offset by gains and losses on the derivative instruments that are linked to these assets and liabilities. 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 posed by changes in interest rates or foreign exchange rates.

NOTE 17 > Quarterly Financial Information (Unaudited) Quarterly results of operations for the years ended December 31, 2014, 2013 and 2012 are as follows:

Northwest FCSâ&#x20AC;&#x2122; 2014 Quarterly Reports to Stockholders are available free of charge by contacting Northwest Farm Credit Services, ACA, P.O. Box 2515, Spokane Washington 99220-2515 or contacting by telephone at (509) 340-5300 or toll free (800) 743-2125. Northwest FCSâ&#x20AC;&#x2122; 2014 Quarterly Reports to Stockholders are also available free of charge at any office location or at www.northwestfcs.com. The 2015 Quarterly Reports to Stockholders will be available on approximately May 8, 2015, August 7, 2015 and November 9, 2015. The Northwest FCS 2015 Annual Report will be available on approximately March 15, 2016.

NOTE 18 > Subsequent Events Northwest FCS has evaluated subsequent events through March 11, 2015, which is the date the financial statements were issued or available to be issued and determined there are no other items to disclose.

Management’s Discussion and Analysis

NORTHWEST FARM CREDIT SERVICES, ACA

Management’s Discussion and Analysis included in this annual report is incorporated herein by

DISCLOSURE INFORMATION REQUIRED BY FARM CREDIT ADMINISTRATION REGULATIONS (UNAUDITED)

reference.

Board of Directors Corporate Governance

Description of Business

The Northwest FCS Board of Directors (the board) is comprised of 14 director positions. Each

General information regarding the business is incorporated herein by reference to Note 1 of the

elected director by the voting membership represents one of the 11 geographic regions that

Consolidated 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 the two outside directors is designated

Management’s Discussion and Analysis of Financial Condition and Results of Operations included in

as a “financial expert” as defined by FCA Regulation. This director brings independence and

this annual report.

financial, accounting and audit expertise to the board and chairs the board’s Audit Committee. The other outside director position is used to bring independence, an outside perspective and other

Description of Property

areas of expertise to enhance board oversight capabilities. Currently, both outside directors qualify

Northwest FCS is headquartered in Spokane, Washington. Northwest FCS owns and leases various

as financial experts and one acts as an alternate to the designated “financial expert.” The third

facilities across the territory it serves, which are described in this annual report.

board-elected director position is a stockholder and is intended to help ensure representation of market segments not currently represented by a stockholder-elected director position or to bring

Legal Proceedings

additional 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.

The 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 comprehensive new

Description of Capital Structure

director orientation program. This program is intended to develop an understanding of the roles

Information regarding capital structure is incorporated herein by reference to Note 8 of the

and responsibilities of a director and to familiarize newer board members with key areas of

Consolidated Financial Statements included in this annual report.

financial performance, reporting and board oversight. This training commitment involves an expectation of attendance at both Farm Credit System and non-System meetings, seminars and

Description of Liabilities

conferences as well as a reasonable effort to complete a comprehensive board training and

Information regarding liabilities is incorporated herein by reference to Notes 5, 7, 10, 11, 15 and

leadership program during their term of service. This balance of training assures not only an

16 of the Consolidated Financial Statements included in this annual report.

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’ operations

Selected Financial Data

against those of other successful lending institutions.

The Five Year Summary of Selected Financial Data included in this annual report is incorporated herein by reference.

The board is independent of management. The President and Chief Executive Officer (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

Audit Committee

comprehensive three-day strategic planning session. The board operates with a structure of five

This committee is made up of at least three board members, including at least one outside

committees: Governance, Audit, Compensation, Risk and Strategy. These committees are

director. All members of the committee are expected to have practical knowledge of finance and

structured to provide focus and expertise in key areas of board oversight and to enhance the

accounting, be able to read and have a working understanding of the financial statements, or

overall efficiency of scheduled board meetings. All policies, substantial contracts and other major

develop that understanding within a reasonable period of time after being appointed to the

initiatives are reviewed by one of these committees, with any actions recommended to the full

committee. The director designated as the “financial expert” serves as the chair of this committee.

board for approval. Each committee approves a charter outlining the purpose of the committee, its

Outside director Christy Burmeister-Smith currently serves in this position. The board has

duties, responsibilities, and authorities. Generally, these responsibilities are advisory in nature, with

determined that Ms. Burmeister-Smith has the qualifications and experience necessary to serve as

the full board acting on committee recommendations. These charters are reviewed and approved

an audit committee “financial expert,” as defined by FCA regulation, and she has been designated

by the full board at least annually. This committee structure is organized to reflect Northwest FCS’

as such. Outside director Julie Shiflett also qualifies as a financial expert and is the designated

key financial and operational areas of risk and to enhance the overall effectiveness of the board’s

alternate to serve in Ms. Burmeister-Smith’s absence.

oversight of these 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 personnel. Internal Audit reports directly to this

With the exception of the Governance and Compensation Committees, committee members, as

committee.

well as the Chairs and Vice Chairs, are identified by the board Chair in consultation with the board Vice Chair and CEO as part of the board’s annual reorganization process. In the case of the

This committee assists the board in fulfilling its oversight responsibility related to accounting

Governance Committee, committee members, as well as the Chair and Vice Chair, are set by policy

policies, internal controls, financial reporting practices and regulatory requirements. This

as outlined below. In the case of the Compensation Committee, the CEO does not participate in

committee has a charter detailing its purpose and key objectives, authority, composition, meeting

identifying its members or its Chair and Vice Chair. The Compensation Committee members, Chair

requirements and responsibilities. The charter, among other things, gives the committee the

and Vice Chair, are identified by the board Chair in consultation with the Vice Chair and at least

authority to hire and compensate the external auditor, approve all audit and permitted non-audit

one 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 Audit Committee’s charter is posted on Northwest FCS’ website at

This committee is made up of the Chair and Vice Chair of the board as well as the Chair of the

www.northwestfcs.com.

Compensation, Audit, Risk and Strategy Committees. The board Chair and Vice Chair act as the Chair and Vice Chair of this committee. The Governance Committee has the authority to review,

Compensation Committee

prioritize and recommend agenda items for board meetings and is responsible for all board policies

This committee is made up of at least three board memebers and includes the board Chair and

not assigned to other committees. Committee duties also include serving as an ad hoc committee

Vice Chair, at least one outside director, and additional board members selected by the board

on major System and organizational issues, including System legislative and regulatory affairs and

Chair in consultation with the board Vice Chair and an outside director. The board Chair also

related matters. This committee also oversees the director nomination and board election

designates the Chair and Vice Chair of this committee. Neither the CEO nor any member of

processes, director training, standards of conduct and serves as a Search Committee for appointed

management can be involved in the selection of committee members, nor can they participate in

director positions and CEO transition, if needed.

any deliberations of the committee on matters relating to their own compensation.

The committee is responsible for reviewing and recommending for full board approval the

It provides oversight of the Local Advisor program, Crop Insurance, Business Management Center

performance goals for the CEO and the evaluation of the CEO’s performance against those goals.

and Knowledge Center. The committee also evaluates management’s assessment of the

It also recommends to the board all actions necessary to administer the CEO’s compensation,

association’s internal strengths and weaknesses and external factors such as economic, competitor

benefits and perquisites under the terms of the CEO’s compensation plan. This committee is also

and political trends. The committee’s authority is generally limited to investigation, development of

responsible for recommending to the board the terms of the senior officers’ compensation plan and

proposed positions and making recommendations to the full board for approval when appropriate.

participation of senior officers in that plan. The board has delegated to the CEO the responsibility to administer the compensation of those senior officers within board approved guidelines.

Northwest FCS Directors

However, the CEO must review the compensation levels for each senior officer with the

The following represents information regarding the directors of Northwest FCS, including their

Compensation Committee before it becomes effective. The committee is also responsible for

principal occupations, business experience and any business in which they serve on the board of

director compensation and for oversight of Northwest FCS’ employee salary structure, benefit

directors or as a senior officer. All directors are elected to serve five year terms and are limited to

plans, all board policies applicable to those plans and other human resource matters not

serving three full terms. Unless otherwise noted, the principal occupation, business experience and

specifically assigned to other committees.

employment of the directors over at least the past five years is related to their farming, ranching or aquatics operations described below.

Risk Committee This committee provides oversight for the majority of the enterprise risk management practices of

R ick Barnes – Callahan, California

the association. This committee reviews credit portfolio policies and management reports that

Elected in 2010; term expires 2015. Member of Audit and Compensation Committees.

monitor compliance with these policies. The committee reviews and approves the quarterly

Principal Occupation/Experience: Owner/Operator, Limerock Ranch, a cow-calf operation with

allowance for credit losses. It also acts on behalf of the board on certain delegated credit related

some timber. Also produces grass hay for the horse market.

matters. The committee reviews and recommends to the full board for approval underwriting

Other Affiliations: Director, Siskiyou Resource Conservation District, which helps manage local

standards and portfolio and lending limit policies that guide all of Northwest FCS’ lending and

and natural resource related challenges.

credit related activities. In addition to monitoring the overall credit characteristics of the industries Northwest FCS serves and the existing portfolio, the committee also reviews and recommends to

Christy Burm eister-Sm ith – New m an Lake, W ashington

the full board for approval certain credit related actions that exceed management’s delegated

Board-Elected Outside Director

authority. This committee also oversees key risk areas associated with budget, operations,

Elected in 2010; term expires 2020. Serves as the designated “financial expert’ on the Northwest

technology, funding, interest rate, liquidity, capital management as well as those risks associated

FCS board. Member of Audit (Chair), Compensation and Governance Committees.

with its alliance partners and counterparties.

Principal Occupation/Experience: Vice President-Controller and Principal Accounting Officer at Avista Corporation, a provider of utility 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 benefits, costs, risks and strategies for considering opportunities such as emerging technologies, product development, joint ventures, strategic alliances, mergers and acquisitions. The committee oversees marketing, advertising, community support and local regulatory and legislative activities.

Drew Eggers – M eridian, Idaho

John Helle - Dillon, M ontana

Elected in 2001, term expired 2014. Member of Audit (Vice Chair) and Strategy Committees

Elected in 2012; term expires 2017. Member of Audit and Strategy Committees.

through March 2014.

Principal Occupation/Experience: Part owner, Helle Livestock, a commercial and purebred

Principal Occupation/Experience: Owner/operator, Drew Eggers Farms. Raises peppermint,

sheep operation. Partner in Rebish and Helle, farming small grains and hay; part owner in Village

spearmint, winter wheat and silage corn.

Vista, LLC, land management; part owner, Duckworth, LLC, a vertically integrated apparel

Other Affiliations: None.

company taking wool from sheep to shelf. Other Affiliations: Director, National Public Lands Council, a group protecting interests of

Jim Farmer – N yssa, Oregon

permittees grazing more than 250 million acres of federally owned grazing lands; Advisory Board

Elected in 2010; term expires 2015. Member of Audit (Vice Chair) and Compensation Committees.

Member, Montana State University Animal and Range Science Department, providing insight and

Principal Occupation/Experience: President and co-owner of Fort Boise Produce Co., a family

overview for the department.

held corporation that packs and markets fresh onions. Secretary and co-owner of Deseret Farms, Inc., a family held corporation that produces onions, wheat, field corn and dry edible beans for

Greg Hirai – W endell, Idaho

seed. Co-owner of farmland and other real estate with brother, Warren Farmer.

Elected in 2014; term expires 2019. Member of Risk and Strategy Committees.

Other Affiliations: Secretary/Treasurer and Director, Nyssa Rural Fire Protection District, formed

Principal Occupation/Experience: Owner, Hirai Farms, L.L.C., a 4,500 acre farm. Produces

to provide fire protection to rural property.

wheat, barley, a variety of potatoes, along with corn, alfalfa and triticale as feed for local dairies. Other Affiliations: Board Member, North Side Canal Company, providing water resources

M ark Gehring – Salem, Oregon

management; Board Member and Chair, Lower Snake River Aquifer Recharge District, a group

Elected in 2010; term expires 2015. Member of Strategy (Chair), Risk and Governance

promoting recharge of the aquifer working through government and users.

Committees. Principal Occupation/Experience: Owner/operator, Gehring Farms; Managing Member, Gibson

Herb Karst – Billings/ Sunburst, M ontana

Creek Farms, LLC. Raises marionberries, blackberries, radish seed, wheat and turf grass seed.

Elected in 2008; term expires 2018. Member of Strategy (Vice Chair) and Risk Committees.

Other Affiliations: None.

Principal Occupation/Experience: President and Manager, Karag, Inc., a family-held corporation producing wheat, malting barley and other crops on a 4,300 acre farm. Barley

David Hedlin – M t. Vernon, W ashington

production consultant with Heineken International.

Elected in 2006; term expires 2016. Member of Risk (Chair), Strategy and Governance

Other Affiliations: Board Member, The Farm Credit Council, a Farm Credit System trade

Committees.

association handling legislative and regulatory matters.

Principal Occupation/Experience: Owner/Partner, R C Koudal Land Co. Raises vegetable seed,

Bruce N elson – Spokane, W ashington

pickling cucumbers, pumpkins and wheat. Other Affiliations: Board Member, Northwest Ag Research Foundation, providing scientific

Elected in 1999; term expired 2014. Member of Compensation and Risk Committees through March

research in food, agriculture and nutrition; Skagitonians to Preserve Farmland, working for

2014.

economic viability through research and education; and Skagit Valley Culinary Arts, a board

Principal Occupation/Experience: Owner/Manager, Nelson Farms, Inc., Silver Creek Farms,

advising on curriculum, community outreach and funding issues; Commissioner, Skagit County

Inc. and Twin Buttes Farms, Inc., raising several varieties of wheat, peas, lentils, barley and

Dike District #9, providing fiscal and administrative oversight on the infrastructure of the district.

nursery trees. Other Affiliations: Director, Washington’s Nature Conservancy Board, an organization providing conservation efforts, and Second Harvest Food Bank, a network of 250 neighborhood food banks

and meal centers throughout Eastern Washington and North Idaho; Ag Advisory Board Member for

Other Affiliations: Advisory Board Member, Southern Montana Experiment Station, providing

Congresswoman Cathy McMorris Rodgers, providing expert advice on agriculture related matters.

agricultural education and research; President, Broadview Community Center Board, a community service center; Treasurer, Stillwater County 4-H Leaders Council, providing youth activities and

Dave N isbet – Bay Center, W ashington

education.

Board-Elected Stockholder director and Board Vice Chair Elected in 2007; term expires 2017. Member of Governance (Vice Chair), Risk and Compensation

Julie Shiflett – Spokane, W ashington

Committees.

Board-Elected Outside Director

Principal Occupation/Experience: Owner, Nisbet Oyster Co., Inc.; President and CEO, Goose

Elected in 2008; term expires 2018. Serves as the alternate to the designated “financial expert” on

Point Oysters, Inc., and Hawaiian Shellfish, LLC. Operates a shellfish processing plant, hatchery

the board. Member of Compensation (Chair), Governance and Audit Committees.

and grows Pacific oysters.

Principal Occupation/Experience: Founding partner of Northwest CFO, which assists emerging

Other Affiliations: Director, Pacific Shellfish Institute, providing research and information for a

and mid-market companies to increase cash flow, profitability, sales, and company value; past

healthy coastal ecosystem; Industry Advisory Board Member, Oregon State University Coastal

Executive Vice President and Chief Financial Officer, Red Lion Hotels; past Chief Financial Officer

Oregon Marine Experiment Station, providing fisheries, aquaculture and marine mammal research.

for Signature Genomic Laboratories and Columbia Paint and Coatings. Other Affiliations: Director and Audit Committee Chair, American Chemet Corporation, a powder

K evin R iel – Yakim a, W ashington

based chemicals manufacturer; Director, Smoky Mountain Metals and Royal Metal Powders,

Elected in 2007; term expires 2017. Member of Risk (Vice Chair) and Strategy Committees.

subsidiaries of American Chemet Corporation; Director, Spokane County Boys and Girls Club, a

Principal Occupation/Experience: President, Double R Hop Ranches, Inc., President, Trigen

youth development organization.

Enterprises, Inc., Managing Partner, WLJ Investments LLC, and 4K Investments, LLC. Farming operations raising hops, apples and Concord grapes.

Shaw n W alters – N ew dale, Idaho

Other Affiliations: Director, Hop Growers of America, a national organization which conducts

Board Elected in 2010 to fill remaining term of vacated director position. Elected in 2011; term

industry advertising and represents hop growers. Director, CoBank.

expires 2016. Member of Compensation (Vice Chair) and Audit Committees. Principal Occupation/Experience: Owner, Shawn Walters Farms, Inc.; Co-Owner, Walters

N ate R iggers – N ezperce, Idaho

Produce, Inc.; Partner in Walters & Walters, Aristocrat Farms, Idaho Grain Producers, and Walters

Elected in 2014; term expires 2019. Member of Audit and Strategy Committees.

Family Limited Partnership; Member, Walters Osgood Farms, LLC; Director, Growmark, a

Principal Occupation/Experience: Manager and Partner, Riggers Clearwater Farms, J.V., a dry

cooperative providing potato marketing. Operates a fresh pack potato facility, grows potatoes,

land farming operation. Raises wheat, barley, canola, grass seed and alfalfa hay.

wheat, barley, alfalfa and canola seed.

Other Affiliations: Board of Trustees member, Leadership Idaho Agriculture, a leadership

Other Affiliations: Director, Enterprise Canal, delivering natural flow and reservoir storage water

development program for farmers and ranchers.

to landowners.

K aren Schott – Broadview , M ontana

Compensation of Directors

Board Chair

Director compensation is under the oversight of the board’s Compensation Committee. The

Elected in 2006; term expires 2016. Member of Governance (Chair), Risk and Compensation

committee conducts periodic director compensation studies to identify current compensation paid

Committees.

to directors of Farm Credit and other similar entities. Based upon these studies, the Compensation

Principal Occupation/Experience: Owner/Secretary, Bar Four F Ranch, Inc. Raises winter

Committee recommends for approval adjustments to director compensation including any pay

wheat, spring wheat, peas, and manages a lease pasture operation.

differentials paid to the Chair or other key board positions. Absent such a study, board policy limits

Information for each director for the year ended December 31, 2014, is as follows:

any adjustment to director compensation to the cost of living index published each year by the FCA. Increases to director compensation typically become effective May 1 of each year. Director compensation in May 2014 was set at a rate of $50,501 per year. The Chairs of both the Audit and Compensation Committees are paid $55,551, representing an additional 10 percent, and the board Chair is paid $60,601 representing an additional 20 percent, reflecting their unique responsibilities and significant additional time demands of these three positions. Director compensation paid annually to all directors was increased by $727 ($800 in the case of the Chairs of the Audit and Compensation Committees, and $5,850 in the case of the board Chair). Each director receives a monthly retainer of $4,208, Chairs of the Audit and Compensation Committees receive a monthly retainer of $4,629, and the Chair of the board receives a monthly retainer of $5,050. No additional per diem is paid for attendance at Northwest FCSâ&#x20AC;&#x2122; meetings or functions. If a director is not able to attend a regular monthly board meeting, then the director only receives the monthly retainer if attendance at or performance of other official business during that month is determined to warrant that payment. In addition, Northwest FCS purchases an Accidental Death and Disability policy for each director. Directors and senior officers are reimbursed for reasonable travel expenses and related expenses while conducting association business. In addition, directors are allowed reimbursement for expenses related to their spouse attending the Annual Stockholder and Local Advisors Meeting, strategic planning session, the December board meeting and one national meeting each year. Directorsâ&#x20AC;&#x2122; spouse travel expenses may also be reimbursed for the legislative fly-in, if the spouse participates in Congressional visits. In all other cases, spouse expenses are reimbursed only if attendance at a meeting is preapproved by the board. The aggregate amount of expenses reimbursed to directors in 2014 was $90,165, compared to $116,238 in 2013 and $106,789 in 2012. The Director Compensation policy is available and will be disclosed to stockholders upon request.

Senior Officers

Tom Nakano, Executive Vice President-Chief Administrative and Financial Officer

Listed below are the CEO and the five individuals collectively referred to as the Senior Officers of

Mr. Nakano was named Executive Vice President-Chief Administrative and Financial Officer

Northwest FCS who served during 2014. Four of the senior officers reported to the CEO and were

effective January 1, 2014. He served as Executive Vice President-Chief Financial Officer between

on the Management Executive Committee (MEC) of Northwest FCS. Information is provided on the

October 2004 and December 2013. Prior to October 2004, he held various positions with

experience of these senior officers, as well as on any business for which they serve on the board of

Northwest FCS since being hired in 1993. Mr. Nakano serves on the Farm Credit Foundations

directors or act as a senior officer and the primary business of that organization.

Consolidated Benefit Trust Committee. This committee oversees the fiduciary and plan administrative responsibilities of the benefit plans offered by a number of Farm Credit employers,

Phil DiPofi, President and CEO

including Northwest FCS. He also serves as a board member of the Oregon State University Alumni

Mr. DiPofi has served as President and CEO since January 1, 2011. Prior to that, he held various

Association which engages alumni and friends to promote the advancement of the university and

senior officer positions with CoBank. Mr. DiPofi currently serves as Vice Chair on the board of

build alumni membership, programs and value-added services.

directors of Financial Partners, Inc. (FPI) which provides technology support for Farm Credit institutions, including Northwest FCS. He also serves on the board of directors of Second Harvest

Mark Nonnenmacher, Executive Vice President-Agribusiness and Capital Markets

Food Bank in Spokane, Washington. Second Harvest leads a network of 250 neighborhood food

Mr. Nonnenmacher has served as Executive Vice President-Agribusiness and Capital Markets since

banks and meal centers throughout Eastern Washington and North Idaho. During 2014, Mr. DiPofi

April 2012. Prior to that, he spent 10 years at CoBank managing the agribusiness lending

was appointed as the Chair of the Business Practices Committee (BPC), a subcommittee of the

operations of their Western Region. He has over 27 years of experience in the System. Mr.

Farm Credit System’s President’s Planning Committee. The BPC was formed to develop specific

Nonnemacher serves as a director on the University of Montana - College of Forestry Advisory

business practices at the Farm Credit Council and with System entities to come up with established

Board. This board provides input to the Dean for program composition, as well as outreach and

protocols and communication plans to deal with reputational issues throughout the Farm Credit

communication. He also serves on the Idaho Cooperative Council Board, providing industry

System.

awareness, education and political involvement in support of Idaho cooperatives.

Fred DePell, Executive Vice President-Financial Services

John Phelan, Executive Vice President-Chief Risk Officer

Mr. DePell has served as Executive Vice President-Financial Services since 1992. Prior to that, he

Mr. Phelan has served as Executive Vice President-Chief Risk Officer since January 2011. Prior to

held various positions with Northwest FCS since being hired in 1978. Mr. DePell serves on the

that, he was Senior Vice President-Commercial Lending and held various positions with Northwest

board of directors of the YMCA of the Inland Northwest. The YMCA is part of the largest not-for-

FCS since being hired in 1992. Mr. Phelan serves on the board of directors of Christian Youth

profit community service organizations in America, working to meet the health and social service

Theatre (CYT), a theatre arts training program for Spokane youth ages 6-18. In late 2014, he was

needs of men, women and children.

appointed to the Credit Work Group, a subcommittee of the Farm Credit System’s President’s Planning Committee. The Credit Work Group provides specific expertise in credit-related activities including risk ratings and loan portfolio management.

Stacy Lavin, General Counsel Mr. Lavin has served as General Counsel since May 2011. Prior to that, he was Assistant General Counsel. Mr. Lavin has worked with Northwest FCS since 2001. Mr. Lavin reports to the Executive Vice President-Chief Administrative and Financial Officer.

2015 Realignment

Bill Perry, State President - Montana

Effective January 1, 2015, a realignment brought lending and insurance staff under common

Mr. Perry has served as Vice President of Enterprise Risk Management and Credit Underwriting

leadership to improve knowledge sharing, marketing, efficiency, teamwork and employee

since 2013. Prior to that, he was Vice President of Credit and held various positions with Northwest

engagement. This new structure will help Northwest FCS expand leadership strength and focus at

FCS since being hired in 2004. Mr. Perry serves as Treasurer for the board of directors of the Alpha

state and branch levels to increase our location marketplace presence and better coordinate

Gamma Rho Fraternity at Montana State University, which is committed to helping young men

resources to serve our customers. Four state groups will be led by state presidents who will be

develop professional and social skills to become exceptional leaders in agriculture.

considered senior officers. Below is information provided on their experience, as well as any organization for which they serve on the board of directors or act as a senior officer and the

Blair Wilson, State President - Idaho

primary business of that organization.

Mr. Wilson has served as Senior Vice President for the southern half of Northwest FCS’ Financial

Brent Fetsch, State President - Oregon

Idaho/Eastern Oregon. He has held various positions with Northwest FCS since being hired

Services Division since 2011. Prior to that, he was Regional Vice-President for Southwestern Mr. Fetsch has served as Senior Vice President-Chief Strategy Officer and Chief Information Officer

in 1979. Mr. Wilson currently serves on the board of directors of the Idaho Food Bank, which is a

since January 2011. Prior to that, he was Senior Vice President-Community Lending and held

nonprofit organization that distributes free food to Idaho families through a network of community-

various positions with Northwest FCS since being hired in 1987. Mr. Fetsch served on the board of

based partners.

directors of the Spokane County United Way, an organization that seeks to mobilize communities

Compensation of CEO and Senior Officers

to create measurable results that improve people’s lives through education, income and health. He also serves as a board member on the Oregon State University – College of Agricultural Sciences

Executive Compensation - Summary

Dean Council and Oregon State University Leadership Academy. The College of Agricultural Sciences at Oregon State University is Oregon’s principal source of knowledge relating to

Our compensation program for the President and Chief Executive Officer (CEO) and other Senior

agricultural and food systems, environmental quality, natural resources, life sciences, and rural

Officers, as defined by FCA regulations, of Northwest FCS is designed to reward management for

economies and communities. The Oregon State University Leadership Academy is a program open

performance that builds long-term value for our stockholders, fulfills our mission, ensures safety

to all undergraduates in the Colleges of Agricultural Sciences and Forestry to assist students

and soundness of our organization and enhances the value of our cooperative. We accomplish this

accepted into the program evaluate their leadership strengths and areas for growth and set goals

by tying a significant portion of compensation for our leadership team to balanced scorecards of

for long-term and short-term leadership development to improve future career success.

performance measures that are consistent with our strategy and mission. To demonstrate our commitment to align compensation with strong governance practices that are

Mandy Minick, State President - Washington

in our stockholders’ interests, the goal of the Compensation Committee (Committee) is to ensure:

Ms. Minick has served as Senior Vice President-Agribusiness, leading the Washington Dairy, Ag Investor, and Cooperative Lending Teams with Northwest FCS since 2011. Prior to that, she was Washington Dairy Team Leader and Sunnyside Branch Manager. She has held various positions with Northwest FCS since being hired in 1994. Ms. Minick is very involved in both the Dairy and Wine Grape industries in Central Washington.

•

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,

•

Overall compensation program design, including incentive plans, does not encourage excessive risk taking, and

•

Best governance practices are followed.

Compensation Philosophy and Objectives

Program Design

Our compensation program is intended to:

Our compensation program for the CEO and Senior Officers has four components:

•

Support a strong and enduring cooperative enterprise,

•

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-

Component Salary

Purpose Pay a competitive salary to reward for experience, skills and performance. Provide a competitive basis for other rewards based on salary.

term opportunities, and provide security contingent upon performance.

Short-Term

Reward for accomplishing annual Northwest FCS goals that over time

Incentive Plan

result in long-term success. Reward for profitability, return on equity,

(STIP)

loan quality, expense control and achieving strategic business objectives. Reward for individual employee contributions.

Linking Pay and Performance Our framework for compensation is designed to pay for performance. To achieve competitive 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 are below our plan, compensation paid will be less than competitive levels. The at-risk component

Long-Term

Reward for sustained performance, safety and soundness of Northwest

Incentive Plan

FCS. Reward for achieving multi-year Northwest FCS goals for

(LTIP)

profitability, return on equity, loan quality, capital adequacy and achieving strategic business objectives. Retain top performers based on

of compensation is provided through short- and long-term incentives while the “fixed” portion is

performance.

salary and benefits, as explained below. Benefits

Provide financial security and convenience through a competitive benefits program and limited perquisites, which are considered “indirect” compensation.

Total

Each component and the total compensation package is managed to be competitive and ensure a linkage to performance.

Performance Assessment

provided performance reviews and in the case of the CEO, the performance review process is

A framework of multiple performance metrics, goals and individual performance assessment

coordinated by the Committee with input and approval by the board.

reinforces our pay for performance philosophy. This framework balances annual and multiple-year performance measures. The STIP is based upon multiple measures of performance, including an

The CEO and all Senior Officers participate in the STIP and LTIP. The target awards for the STIP

individual performance factor. The LTIP is based on various performance measures over multiple

range from 15 percent to 60 percent of salary and the actual STIP awards may range from 0

years of organizational results.

percent to twice the target award, depending on Northwest FCS’ and the individual’s performance. STIP awards are paid in the year following the performance period based on achievement of targets and goals and after audited financial statements are issued. Target awards for the LTIP

The following table summarizes the scorecards for each plan:

range from 20 percent to 65 percent of salary, with a range of opportunity from 0 percent up to Component

Weight

Measure/Goal

twice the target award.

Performance Period

STIP

30%

After-tax Net Income

An LTIP was implemented in 2012 with a “stub plan” based on 2012-2013 performance. In

20%

Return on Equity

addition, to facilitate the transition from the prior LTIP to the new LTIP, a one-year stub plan was

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

Northwest FCS’ long-term success and are directly correlated to the pay received by Senior

25%

Strategic Business Objectives

Officers. Components of compensation increased or decreased in 2014 based on the level of

implemented based upon 2012 performance. LTIP awards for the 2012 stub plan were paid in

Annual

2013 based upon the 2012 performance period. The 2012-2013 LTIP stub plan awards were paid in 2014, and the 2013-2014 LTIP stub plan awards will be paid in 2015 as disclosed in the Summary Compensation Table. Future awards will be based on three years of performance;

LTIP

current plans include the 2013-2015 LTIP and 2014-2016 LTIP. Multiple-Year

The measures used in incentive compensation are what we believe to be the key drivers of

achievement of these goals, which are tied to Northwest FCS’ mission and strategy. At the beginning of each performance period, the Committee approves financial targets and goals for each category, including minimum levels of performance required in order for an award to be

To calculate incentive awards, Northwest FCS aggregates the performance under each plan and

earned in each category, and maximum levels of performance on which incentive will be paid. The

calculates a separate Corporate Performance Factor for the STIP and LTIP. For the STIP, individual

approved financial targets and goals are aligned with the organization’s business plan financial

performance is assessed (see Performance Assessment above) and used to determine an

metrics to ensure Senior Officer incentives match business plan objectives. In addition, a minimum

Individual Performance Factor used in the incentive award calculation.

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 rewards align with our pay for performance philosophy. In addition to the measures and goals listed above, the adjustments to base salary and STIP awards are impacted by the individual performance of the participant. Participants that voluntarily terminate employment or do not maintain satisfactory performance also forfeit any short and longterm awards. As a part of Northwest FCS’ performance management process, all employees are

Actual awards under the STIP and LTIP for the CEO and Senior Officers were determined as

Compensation Governance Process and Decisions

follows:

The Committee is composed of members of the board 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 an independent consultant. The Committee’s process includes:

Actual STIP and LTIP awards earned for the CEO and other Senior Officers are presented in the following Summary Compensation Table.

•

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.

Encouraging Appropriate Risk Taking Our compensation program is structured to provide a balance of components that are based upon

•

multiple financial and non-financial measures of performance. It is designed to encourage the

using market comparisons and performance assessments.

appropriate level of risk-taking, consistent with maintaining safety and soundness, and

•

measurements aligned with our business strategy and mission. The Committee has taken the taking: 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

•

not create a material adverse risk to the organization. In conducting its responsibilities as determined by the board, the Committee has reviewed and concluded that:

Engaged an independent consultant to conduct a risk review of our compensation and benefit

•

Long-term compensation and retirement benefit obligations are appropriate for the participants in the plans and their roles and responsibilities.

Approved performance targets and ranges for STIP and LTIP metrics that align with our business plan, strategy and mission.

•

An annual assessment of the risk of programs to ensure the operation of the programs does

Incorporated individual performance into the STIP based upon our performance management

programs. •

Reviewing and approving programs that provide benefits or potential benefits to management such as employment agreements, severance benefits and other benefit programs.

system. •

Approving overall compensation plans and any design changes to compensation programs for the annual compensation period.

nonfinancial measures and goals. •

Approving actual awards under incentive programs for the CEO based upon performance assessments.

following measures to ensure our compensation program does not encourage inappropriate risk

•

Determining and approving each component of CEO compensation for the next fiscal year

•

Incentive programs are not unreasonable or disproportionate to the services provided by Senior Officers and other employees of Northwest FCS.

Retained discretion to adjust awards as needed. •

Levels and design of Senior Officer total compensation align with Northwest FCS’ strategy.

CEO Compensation

against Northwest FCS that relate to his employment with Northwest FCS. The agreement also

The Committee reviews and approves the CEO’s total compensation based on the CEO’s

provides for non-solicitation by the CEO for 24 months following termination of employment.

performance, Northwest FCS’ performance, and market considerations prepared by an independent consultant. Market considerations include compensation for CEOs of comparable financial

Senior Officer Compensation

institutions, including other Farm Credit System entities. The CEO participates in the STIP and LTIP

Senior Officers participate in the STIP and LTIP in addition to receiving base salary and benefits

programs provided for Senior Officers of Northwest FCS, in addition to receiving salary and

generally provided to management personnel. The Committee reviews the total compensation of

benefits. The CEO’s STIP potential in 2014 was a target of 60 percent to be awarded for meeting

the Senior Officers appointed to serve on the MEC based on their individual performance

the pre-established goals described above, with the opportunity to earn up to twice the target for

assessments provided by the CEO, Northwest FCS’ performance, and market considerations

exceeding those goals. The CEO’s LTIP award potential was a target of 60 or 65 percent

prepared by an independent consultant using the same comparable financial institutions as used

depending on the respective plan, to be awarded for meeting pre-established goals, with a

for the CEO’s compensation. The STIP and LTIP provide Senior Officers the opportunity to earn

maximum award of twice the target for exceeding the goals.

awards as a percent of their base salaries for meeting pre-established performance goals. For 2014, STIP targets ranged from 15 percent to 35 percent, with the potential to earn a maximum of

The “Short-Term Incentive Compensation” shown in the following table reflects the STIP earned by

twice the target for exceeding those goals, and an LTIP target of 20 percent to 40 percent, with

the CEO in each year. The “Long-Term Incentive Compensation” shown for 2012 reflects the LTIP

the potential to earn a maximum of twice the target for exceeding those goals.

stub plan award for achievement of performance goals during 2012; 2013 represents the 20122013 two-year LTIP stub plan award for achievement of performance goals during 2012-2013, and

As of December 31, 2014, the Senior Officers appointed to serve on the MEC are provided

2014 represents the 2013-2014 two-year LTIP stub plan award for achievement of performance

specified severance and other benefits in the event their employment is terminated, except for

goals during 2013-2014. Future awards are based upon three years of performance and current

termination for cause. In the event of termination, except for cause, a Senior Officer is entitled to

plans include the 2013-2015 LTIP and 2014-2016 LTIP.

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

Northwest FCS makes an annual contribution to the CEO’s Non-Qualified Defined Contribution Plan

lawsuits against Northwest FCS that relate to their employment with Northwest FCS. The

in an amount equal to the lesser of $200,000 or 15 percent of the total of his base salary and

agreement also provides for non-solicitation by the Senior Officer for 24 months following

short-term incentive award. It is reported under “Deferred and Perquisites” in the following table.

termination of employment.

The amounts earned related to this award were $175,018, $161,561 and $145,092 for the years ended December 31, 2014, 2013 and 2012, respectively.

Summary Compensation Table The compensation shown in the following table is the actual compensation earned by the CEO and

As of December 31, 2014, the CEO is employed pursuant to an employment agreement. The

Senior Officers during the years ended December 31, 2014, 2013 and 2012. The 2014 period also

agreement is renewable each year through December 31, 2017 for successive five year terms. The

includes compensation earned by one highly compensated employee, as required by FCA

employment agreement provides specified compensation and related benefits in the event his

regulations. The “Short-Term Incentive Compensation” shown reflects the short-term incentive

employment is terminated, except for termination for cause. In the event of termination except for

earned in each year, which is paid in the following year. The “Long-Term Incentive Compensation”

cause, the employment agreement provides for (a) payment of his prorated salary and incentives

shown reflects the long-term awards in the year they were earned, together with any gains or

and (b) payment of three times his base compensation. The employment agreement also provides

losses incurred, where applicable, on those awards that were held in trust.

certain limited payments upon death or disability. To receive payments and other benefits under the agreement, the CEO must sign a release agreement to give up any claims, actions or lawsuits

Officers are reimbursed for travel expenses and related expenses while conducting business for Northwest FCS and the travel policy is available and will be disclosed to stockholders upon request. The table below provides certain pension information by plan for the only Senior Officer participating in this plan. There were no individuals outside of the Senior Officer noted which required disclosure and the CEO is not a participant in this plan.

(1) Represents the STIP previously described for 2014, 2013 and 2012 which is paid in the first quarter of the year subsequent to the reported year to persons who continue to be employed by Northwest FCS or unless otherwise provided for. The 2014 year includes commission incentives for the highly compensated employee. The 2012 year also includes a signing bonus for an executive hired within that year. The actuarial present values of accumulated benefits for plans noted within the table are funded

(2) Represents the LTIP described previously for the 2013-2014 stub plan (presented within 2014),

by Northwest FCS.

2012-2013 stub plan (presented within 2013) and the 2012 stub plan (presented within 2012). There is an additional long-term bonus program in which the CEO and certain Senior Officers

The Defined Benefit Pension Plan (Pension Plan) provides participants with various options at

previously participated in. During the year ended 2014, the plan balance that became vested by

normal retirement (age 65). Participants may elect to receive a normal retirement benefit upon

the CEO was $356,564 which was presented in the summary compensation table in 2011, the year

retirement or otherwise terminate their employment and satisfy certain conditions. A normal

granted. During the years ended 2014, 2013 and 2012, plan balances which became vested

retirement benefit is based on, but not limited to, the highest consecutive 60 months’ salary and

related to this plan by senior officers totaled $198,337, $178,894 and $185,066 for awards granted

the participant’s total years of service in the plan (maximum of 35 years). Participants may elect to

in 2011, 2010 and 2009, respectively, and were presented in the summary compensation tables for

receive their accrued vested pension benefits as an annuity or as a single lump sum distribution. A

those respective years. The market value adjustments on balances while held in trust are included

lump sum distribution includes the present value of a single life annuity based on mortality and

in each respective year. The information presented for 2012 also includes payments to certain

interest rate assumptions defined in the Pension Plan. The Pension Plan provides benefits up to the

Senior Officers for a separate prior plan.

applicable limits under Internal Revenue Code (IRC) Sections 401(a) (17) and 415.

(3) Various deferred or perquisite amounts including, but not limited to, the CEO Non-Qualified

The Defined Benefit Pension Restoration Plan (Restoration Plan) provides eligible employees

Defined Contribution Plan discussed previously, other non-qualified contributions made by

benefits which were limited by IRC Sections 401(a) (17), 415 or any Code provision or government

Northwest FCS, vacation adjustments, and vehicle allowances.

regulations subsequently issued, and therefore are not available under the Pension Plan. The monthly benefit is equal to the difference between the participant’s actual monthly retirement

(4) Represents 401(k) employer contributions, other compensation of minimal value and the

benefit payment under the Pension Plan and the monthly retirement benefit payment that would

change in pension value for one Senior Officer. The 2014 year includes a scheduled retirement

be payable to the participant under the Pension Plan if the limitations of IRC 401(a) (17), 415 or

payment for the highly compensated employee.

any code provision or government regulations subsequently issued, did not apply. The Restoration Plan valuation was determined using an assumption that benefits will be distributed as a lump sum

Total compensation paid during the last fiscal year to any Senior Officer, or to any other employee

at the participants’ earliest unreduced retirement age.

included in the aggregate, is available and will be disclosed to stockholders upon request. Senior

•

Transactions with Senior Officers and Directors

The major terms of any capital preservation, loss sharing or financial assistance agreements

Information regarding related party transactions is incorporated herein by reference from Note 12

between Northwest FCS and CoBank, ACB are discussed in Notes 2 and 8 of the Consolidated

to the Consolidated Financial Statements included in this annual report.

Financial Statements. •

Involvement in Certain Legal Proceedings

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

There were no events during the past five years that are material to evaluating the ability or

CoBank, ACB is discussed in Note 1 and Note 4 of the Consolidated Financial Statements.

integrity of any person who served as a director or Senior Officer on January 1, 2015, or at any •

time during 2014.

CoBank, ACB is required to distribute its annual report to shareholders of Northwest FCS if a “significant event,” as defined by FCA regulation occurs.

Relationship with Independent Public Auditors There were no changes in independent public auditors since the prior annual report to

Privacy Protection Afforded Under FCA Regulations

stockholders. In addition to audit services, the independent public auditors,

Customer financial privacy and the security of other non-public information are important.

PricewaterhouseCoopers LLP, performed non-audit services for a fee of approximately $9,000 in

Therefore, Northwest FCS holds customer financial and other non-public information in strict

2013, which were approved by the audit committee. There were no similar fees incurred during

confidence. Federal regulations allow disclosure of such information by Northwest FCS only in

2014 or 2012. There were no material disagreements with the independent public accountants on

certain situations.

any matter of accounting principles or financial statement disclosure during this period.

Audit Fees and Expenses Fees and expenses incurred by Northwest FCS for audit services rendered by its independent public auditors, PricewaterhouseCoopers LLP, were approximately $442,000 at December 31, 2014, and $401,500 and $368,500 at December 31, 2013 and 2012, respectively. These fees and expenses were incurred for the annual financial statement audit for all years and included the audit of internal controls over financial reporting as of December 31, 2013 and 2012.

Consolidated Financial Statements The Consolidated Financial Statements, together with the Report of Independent Auditors dated February 27, 2015, 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.

•

NORTHWEST FARM CREDIT SERVICES, ACA

DESCRIPTION AND STATUS REPORT ON THE YOUNG, BEGINNING AND SMALL FARMERS PROGRAM (dollars in thousands, except as noted)

•

To develop business relationships with next generation producers who: o

Exhibit the management skills necessary to build a solid financial position,

Contribute to the agricultural community, and

Will become profitable customers for the association.

To provide adequate board oversight to ensure the needs of this market are met on a constructive, safe, and sound basis.

Program Definitions

Services Provided

Northwest FCS has a specific program in place to serve the credit and related needs of young, beginning and small farmers and ranchers (YBS) in our territory. The definitions of young,

Several credit and related services are offered through the board approved YBS Program directly

beginning and small farmers and ranchers, as developed by the Farm Credit Administration are:

and in coordination with other organizations that allow Northwest FCS to effectively serve the

•

needs within these producer segments. Highlights of the YBS Program include:

Young – A farmer, rancher, producer or harvester of aquatic products who is age 35 or

•

younger, as of the loan transaction date. •

Beginning – Any farmer, rancher, producer or harvester of aquatic products who has 10

standards. AgVision customers account for $352,932 of loan volume. Through this program,

years or less farming or ranching experience, as of the loan transaction date. •

special consideration is given in loan underwriting ratios, interest rate reductions, and

Small – Any farmer, rancher, producer, or harvester of aquatic products who generates less

origination and appraisal fee waivers. More than $1,400 in fee waivers have been provided to

than $250 in annual gross sales of agricultural or aquatic products as of the loan transaction

AgVision customers since 2001, with over $98 in fees waived in 2014.

date.

•

Mission and Objectives

of the AgVision program. Reimbursements totaled $49 in 2014. •

To advance young, beginning, and small farmers' success via deliberate strategies in lending and

We have an advisory group which includes young, beginning and small farmers and ranchers who provide Northwest FCS with customer feedback, function as a liaison to association

professional development.

management and advance the YBS program impact within the agricultural community.

Objectives of the Program

•

Our RateWise program rewards YBS producers for continuing their management education with interest rate reductions on new loans.

To promote agriculture by encouraging and developing competent YBS customers to enter into or remain in agriculture by supporting their efforts to do so.

•

More than $565 has been reimbursed to customers for educational expenses, technology purchases, recordkeeping and tax planning and preparation services since the 2001 inception

Mission Statement

•

The AgVision program enhances our ability to serve the young, beginning and small producers who are actively involved in farming and those who may not meet traditional credit

•

Northwest FCS’ interest only, JumpStart loan program is designed to help entrepreneurs begin promising new ventures in agriculture.

To recognize the challenges facing YBS customers attempting to obtain credit and establish a viable enterprise and to establish Northwest FCS as a leader in providing the products and

•

services necessary for them to succeed.

Customer education programs are tailored to YBS producers focusing on areas such as farm economics, financial literacy, profitability, cash flow, personal finance and succession planning, with several of these workshops conducted in Spanish each year.

•

The Northwest FCS’ Business Management Center helps customers assess, understand and improve management practices through group and individual interactions via orientations, workshops and consulting. Numerous YBS customers have taken part in these various programs.

•

Northwest FCS provides donations and sponsors state and local Future Farmers of America (FFA) and 4-H activities and conventions, agricultural leadership and educational programs and other youth programs.

•

YBS Volume in the Northwest FCS Portfolio

In 2014 Northwest FCS awarded over $48 in college scholarships to qualified high school

The following table reflects the percentage of YBS producers’ loans in the Northwest FCS loan

seniors and $27 in scholarships to college students. •

•

portfolio as of December 31, 2014. Methods by which the Census demographics and the Northwest

Northwest FCS offers crop insurance and life insurance to help our YBS producers mitigate

FCS’ data are presented differ as the Census data is based on number of producers, while the

risk.

Northwest FCS’ data is based on number of loans. Additionally, the FCA definition of a young

A portion of the YBS producers’ loan portfolio is supported by government guarantees,

farmer is an individual who is 35 years or younger, while the USDA uses an individual 34 years old or less; and FCA beginning farmers have 10 years or less farming or ranching experience while the

including guarantees by the Farm Service Agency (FSA) and the U.S. Department of

Census of Agriculture considers nine years or less farming or ranching experience. The USDA small

Agriculture’s (USDA) Business and Industry Guaranteed Loan Program.

producers’ definition aligns closely with the FCA definition and overall the USDA study is the most

Government Guaranteed Loans to YBS Farmers and Ranchers

useful tool to accurately measure association YBS goals and results. Young, Beginning and Small Farmers and Ranchers – Number and Volume of Loans Outstanding (including available commitment)

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 2012 Census of Agriculture to the 2007 census for YBS producers in our area. This census is conducted every five years. 2012 Census data became available in 2014. Census of Agriculture - Young, Beginning and Small Producers 2012 vs. 2007 The 2012 Census of Agriculture results show a 0.9 percent increase in young producers and an 8.0 percent decrease in small producers from 2007 to 2012. The beginning producer data cannot be compared between the 2012 and 2007 census due to a change in the census process. The 2007 census data for beginning producer counted “years on present farm” and in 2012 counted “years operating any farm.”

Goals and Results Quantitative goals have been established each year by board policy for YBS producersâ&#x20AC;&#x2122; loan volume and numbers based on demographic data. The 2014 goals are as follows: 2014 Young, Beginning and Small Service Goals & Results

NORTHWEST FARM CREDIT SERVICES, ACA

OFFICE LOCATIONS Northwest FCS

Idaho

Montana

Oregon

Washington

Headquarters

73 Fort Hall Avenue, Suite A American Falls, Idaho 83211 (208) 226-1340

3490 Gabel Road, Suite 300 Billings, Montana 59108 (406) 651-1670

3370 10th Street, Suite B Baker City, Oregon 97814 (541) 524-2920

265 E George Hopper Road Burlington, Washington 98233 (360) 707-2353

370 N Meridian Street, Suite A Blackfoot, Idaho 83221 (208) 782-3800

1001 W Oak Street, Suite 200 Bozeman, Montana 59715 (406) 556-7300

2345 NW Amberbrook Drive, Suite 100 Beaverton, Oregon 97006 (503) 844-7920

629 S Market Boulevard Chehalis, Washington 98532 (360) 767-1100

1408 Pomerelle Avenue, Suite B Burley, Idaho 83318 (208) 678-6650

519 S Main Street Conrad, Montana 59425 (406) 278-4600

650 E Pine Street, Suite 106A Central Point, Oregon 97502 (541) 665-6100

224 N Main Street Colfax, Washington 99111 (509) 397-2840

501 King Street Cottonwood, Idaho 83522 (208) 962-2280

38 A South Central Avenue Cut Bank, Montana 59427 (406) 873-9070

2911 Tennyson Avenue, Suite 301 Eugene, Oregon 97408 (541) 685-6140

1501 E Yonezawa Boulevard Moses Lake, Washington 98837 (509) 764-2700

1215 Pier View Drive Idaho Falls, Idaho 83402* (208) 552-2300

134 E Reeder Street Dillon, Montana 59725 (406) 683-1200

300 Klamath Avenue, Suite 200 Klamath Falls, Oregon 97601 (541) 850-7500

9530 Bedford Street Pasco, Washington 99301 (509) 542-3720

2631 Nez Perce Drive, Suite 201 Lewiston, Idaho 83501 (208) 799-4800

501 1st Avenue S Glasgow, Montana 59230 (406) 228-3900

308 SE 10th Street Ontario, Oregon 97914 (541) 823-2660

6119 Burden Boulevard, Suite B Pasco, Washington 99301 (509) 542-3720

16034 Equine Drive Nampa, Idaho 83687 (208) 468-1600

700 River Drive S Great Falls, Montana 59405 (406) 268-2200

12 SW Nye Avenue Pendleton, Oregon 97801 (541) 278-3300

201 W Broadway Avenue, Suite B Ritzville, Washington 99169 (509) 659-1105

102 N State Street, Suite 2 Preston, Idaho 83263 (208) 852-2145

1705 US Highway 2 NW, Suite A Havre, Montana 59501 (406) 265-7878

3113 S Highway 97, Suite 100 Redmond, Oregon 97756 (541) 504-3500

2157 N Northlake Way, Suite 120 Seattle, Washington 98103 (206) 691-2000

1036 Erikson Drive Rexburg, Idaho 83440 (208) 656-2100

120 Wunderlin Street, Suite 6 Lewistown, Montana 59457 (406) 538-7737

2222 NW Kline Street Roseburg, Oregon 97471 (541) 464-6700

1515 S Technology Boulevard, Suite B Spokane, Washington 99224 (509) 340-5600

815 N College Road Twin Falls, Idaho 83303 (208) 732-1000

502 S Haynes Avenue Miles City, Montana 59301 (406) 233-3100

650 Hawthorne Avenue SE, Suite 210 Salem, Oregon 97309 (503) 373-3000

2735 Allen Road Sunnyside, Washington 98944 (509) 836-3080

139 River Vista Place, Suite 201 Twin Falls, Idaho 83301 (208) 732-1000

3021 Palmer Street, Suite B Missoula, Montana 59808 (406) 532-4900

3591 Klindt Drive, Suite 110 The Dalles, Oregon 97058 (541) 298-3400

1 W Pine Street Walla Walla, Washington 99362 (509) 525-2400

1700 S Assembly Street Spokane, Washington 99224 (509) 340-5300 Future Headquarters 2001 S Flint Road Spokane, Washington 99224*

* Northwest FCS Owned

123 N Central Avenue Sidney, Montana 59270 (406) 433-3920

667 Grant Road, Suite 1 East Wenatchee, Washington 98802 (509) 665-2160 1360 N 16th Avenue Yakima, Washington 98902 (509) 225-3200