Northwest Farm Credit Services 2010 Annual Report by Northwest Farm Credit Services

IN GOOD HANDS

AN AMAZING TEAM

LAYING THE FOUNDATION

PROGRESSIVE LEADERSHIP

BOARD OF DIRECTORS

N OR TH W ES T

FARM

CR E D I T

SE R V I CE S,

AC A

Letter To Stockholders Northwest FCS was successful in 2010 despite another year of continued uncertainty for the financial services industry and agriculture. Volatility in the global economy has impacted American agriculture and Northwest FCS customers. Tightening global inventories and strong demand for U.S. supplies have increased grain prices. Conversely, grain price increases have raised the cost of feed for the protein sector. A year ago the threat of a double dip recession was very concerning for the American economy. While that did not happen, high unemployment levels and the troubled housing market are still impacting the economy. This continues to impact the forest products and nursery industries.

Financial Performance We are extremely pleased to report that Northwest FCS remains in a strong financial position. For 2010, our net income was $150.1 million, our permanent capital was 13.2 percent and we returned approximately $36.0 million in patronage to eligible stockholders. Our board and management have remained true to our core values and promise to be a stable, financial source for Rural America over the long term. This is especially important during a period of economic volatility. Although many financial institutions experienced turmoil during the last three years, Northwest FCS experienced strong earnings and continues to provide uninterrupted, competitively priced credit to our customers. An earnings increase of 41.5 percent over the last year reflects a move

products and grass seed, struggled over the last three years, which impacted the association’s portfolio. Neither the housing industry nor housing starts will likely improve significantly in 2011. Conversely, the apple, hay, potato, sugar beet, and wheat producers enjoyed strong earnings in 2010, and the protein industries, including dairy, hogs, cattle and poultry, improved. Increased feed and energy costs will require customers to carefully manage their 2011 cost of production. One of the association’s greatest strengths is the diversity of the agricultural, forestry, and fisheries products produced in the association’s five-state territory. Each of the top seven commodities financed represent between 5.8 and 14.1 percent of the total portfolio, with dairy at the highest concentration.

Strategic Goals and Priorities The board establishes annual business plan goals for each key area of the association. For 2010, the association was very successful in achieving goals for both capital and earnings management. The key focus area continues to be credit and related risks associated with the dairy and nursery portfolios and the declining asset values associated with those industries. The association’s strong financial position allows us to continue working with customers experiencing financial stress and to declare patronage for the eleventh consecutive year. The board and management continue to pursue multiple strategies to take advantage of opportunities as they occur and as market conditions change. During 2010 the focus was on the following:

to more normal earnings after a decrease in 2009. The increase can be attributed to a numbers of factors. In 2009, earnings decreased as allowance for loan loss reserves were increased to offset

•

Capital allocation

•

Assocation earnings

•

Portfolio management and assessment

•

Human resources

•

Identification and evaluation of future business opportunities

•

Monitoring and understanding external influences

•

Continued development of board governance and leadership

risks in several commodities financed. The 2010 earnings were positively affected by a decrease in Farm Credit System Insurance Corporation premiums and a refund of previous premiums paid. Other contributors to increased earnings were external real estate appraisal fees and higher loan spreads due to lower funding costs and pricing adjustments to reflect the higher level of risk in the portfolio. Northwest FCS has not escaped the challenges of the economic downturn as evidenced by a decrease in the credit quality of our loan portfolio over the last two years.

Portfolio Performance Although conditions for many Pacific Northwest commodities were better in 2010, the overall credit quality of our loan portfolio deteriorated due to the impact of stress experienced by customers in 2009. Industries closely tied to the housing market, including nursery, forest

2010 ANNUAL REPORT

While continuing to think long-term, the board and management are highly focused on the next

association is in a strong financial position during this time of leadership transition, and we will

12 to 24 months because of the elevated credit risk within the portfolio. Strategies include:

continue to manage the challenges of the difficult economy.

•

Review optimum long-term capital level targets, focusing on possible increased risk factors in the loan portfolio and opportunities for future growth.

Our continued partnership with CoBank is a strong component of our market presence. The

Ensure loan pricing and structure strategies account for adequate profitability, growth, risk management, earnings, and capital, while continuing to balance competitive factors.

with CoBank’s national presence and financial products helps each organization to excel and

•

combination of Northwest FCS’ strong regional delivery system and brand recognition, along better serve customers.

•

Effectively manage human resources.

•

Continue to enhance portfolio management.

continued volatility, uncertainty, and stress, others found excellent opportunities. It was a year to

•

Seek new loan growth and other earning sources.

demonstrate our continued leadership and commitment to providing dependable and competitive

•

Expand our knowledge of the industries we finance, and share information with customers and staff to enhance their decision-making abilities.

will again be evident as the board and management execute our strategic priorities and continue

•

Increase awareness, understanding, and support for Northwest FCS’ commitment to diversity and inclusion.

•

Evaluate and develop technology solutions to best meet customer service requirements and to help improve operating efficiencies.

•

Recognize, manage and capitalize on resources, opportunities and challenges to accomplish the association’s strategic priorities and fulfill its mission.

•

Continually develop board governance and leadership.

Patronage Program Highlights For the eleventh consecutive year, the board has authorized patronage distributions to eligible stockholders. While it’s important to retain adequate earnings to capitalize the association for financial soundness purposes, it’s also important to share a portion of our earnings with those we serve. For 2010, we returned patronage of approximately $36.0 million. For most customers, this represents 0.50 percent of their average daily loan balance. We are pleased to provide patronage to our stockholders as a benefit of participating in a successful cooperative. Patronage creates a strategic advantage for both our stockholders and the association.

Stability through Transition After 21 years as president and CEO, Jay Penick retired at the end of 2010, handing over the reins to Phil DiPofi. The board and management want to express our sincere appreciation and gratitude to Jay for all he has done for our stockholders and the industries we serve. The

NORTHWEST FCS

Overall, 2010 was a very successful year for our association. While some industries experienced

financing. As we continue to face challenging economic times, our stability through transition to focus on serving the needs of our customers.

Phil DiPofi

Drew F. Eggers

President and CEO

Chair of the Board

March 7, 2011

2010 NORTHWEST FARM CREDIT SERVICES, ACA Annual Report to Stockholders

2010 ANNUAL REPORT

N OR THW ES T

FARM

CR E D I T

SE R V I CE S,

AC A

REPORT OF MANAGEMENT

dependent auditors and the internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the adequacy of the internal control structure for financial reporting and any other matters they believe should be brought to the attention of the committee.

The financial statements of Northwest Farm Credit Services, ACA (Northwest FCS) are prepared by management, who is responsible for their integrity and objectivity, including amounts that

The undersigned certify the 2010 Annual Report to Stockholders has been prepared in accor-

must be necessarily based on judgments and estimates. The financial statements have been

dance with all applicable statutory or regulatory requirements and the information contained

prepared in conformity with accounting principles generally accepted in the United States of

herein is true, accurate, and complete to the best of our knowledge.

America. The financial statements, in the opinion of management, fairly present the financial

condition of Northwest FCS. O ther financial information included in the 2010 Annual Report to Stockholders is consistent with that in the financial statements.

To meet their responsibility for reliable financial information, management depends on Northwest FCS’ accounting and internal control systems, which have been designed to provide reasonable, but not absolute, assurances that assets are safeguarded and transactions are properly authorized and recorded. The systems have been designed to recognize the cost must be related to the benefits derived. To monitor compliance, the internal audit staff performs audits of the accounting records, reviews accounting systems and internal controls, and recommends improvements as appropriate. The financial statements are audited by PricewaterhouseCoopers LLP, independent auditors, who, as part of the audit process, also conduct an audit of internal controls to obtain a sufficient understanding of the internal control structure in order to establish a basis for reliance thereon in determining the nature, extent, and timing of procedures applied to the audit of the financial statements. Northwest FCS is also examined by the Farm Credit Administration.

The Chief Executive O fficer, as delegated by the Northwest FCS Board of Directors, has overall responsibility for Northwest FCS’ system of internal controls and financial reporting. The Board has delegated significant responsibility to the Audit Committee, which is comprised entirely of directors who are independent of Northwest FCS’ management. The Audit Committee is responsible for recommending to the Board the selection of independent auditors. It meets periodically with management, the independent auditors, and the internal auditors to ensure they are carrying out their responsibilities. The Audit Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting, and auditing procedures of Northwest FCS in addition to reviewing Northwest FCS’ financial reports. The in-

NORTHWEST FCS

Phil DiPofi President and CEO March 7, 2011

Tom Nakano Executive Vice President-CFO March 7, 2011

Drew F. Eggers Chair of the Board March 7, 2011

N OR TH W ES T

FARM

CR E D I T

SE R V I CE S,

AC A

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Additionally, based on this assessment, Northwest FCS determined there were no material weaknesses in the internal control over financial reporting as of December 31, 2010.

Northwest FCS’ independent auditors, PricewaterhouseCoopers LLP, who audit Northwest FCS’ consolidated financial statements, have issued a report on the effectiveness of internal control over financial reporting. See Report of Independent Auditors.

Management of Northwest Farm Credit Services, ACA and its wholly-owned subsidiaries (Northwest FCS) is responsible for establishing and maintaining adequate internal control over financial reporting for Northwest FCS’ consolidated financial statements. For purposes of this report, “internal control over financial reporting” is defined as a process designed by or under the supervision of Northwest FCS’ principal executives and principal financial officers,

Phil DiPofi President and CEO March 7, 2011

Tom Nakano Executive Vice President-CFO March 7, 2011

Drew F. Eggers Chair of the Board March 7, 2011

or persons performing similar functions, and effected by its board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting information and the preparation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Northwest FCS, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial information in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and directors of Northwest FCS, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Northwest FCS’ assets that could have a material effect on its consolidated financial statements.

Northwest FCS’ management has completed an assessment of the effectiveness of internal control over financial reporting as of December 31, 2010. In making the assessment, management used the framework in Internal Control—Integrated Framework, promulgated by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as the “COSO” criteria.

Based on the assessment performed, Northwest FCS concluded that as of December 31, 2010, the internal control over financial reporting was effective based upon the COSO criteria.

2010 ANNUAL REPORT

N OR THW ES T

FARM

CR E D I T

SE R V I CE S,

AC A

REPORT OF AUDIT COMMITTEE

Based on the foregoing review and discussions, and relying thereon, the Audit Committee recommended the Board of Directors include the audited financial statements in the annual report as of and for the year ended December 31, 2010.

The Audit Committee is composed of six members of the Northwest FCS Board of Directors. In 2010, the Audit Committee met five times in person and participated in several conference calls. The Audit Committee oversees the scope of Northwest FCS’ internal audit program, the independence of the outside auditors, the adequacy of Northwest FCS’ system of internal controls and procedures, and the adequacy of management’s action with respect to recom-

Christy Burmeister-Smith Chair of the Audit Committee March 7, 2011

mendations arising from those auditing activities. In addition, the Audit Committee approved the appointment of PricewaterhouseCoopers, LLP (PwC) as our independent auditors for 2010.

Herb Karst

The Audit Committee’s responsibilities are described more fully in the Internal Controls Policy

Karen Schott

and the Audit Committee Operating Statement.

Dave Nisbet Kevin Riel

Management is responsible for internal controls and the preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America. PwC is responsible for performing an independent audit of the financial statements in accordance with generally accepted auditing standards in the United States of America and to issue their report based on the audit. The Audit Committee’s responsibilities include monitoring and overseeing these processes.

In this context, the Audit Committee reviewed and discussed the audited financial statements for the year ended December 31, 2010, with management. The Audit Committee also reviewed with PwC the matters required to be discussed by Statement on Auditing Standards No. 114, as amended (Communication with Audit Committees), and both PwC and the internal auditors directly provided reports on significant matters to the Audit Committee.

The Audit Committee received the written disclosures and the letter from PwC in accordance with Independence Standards Board Standard No. 1 (Independence Discussion with Audit Committees), and discussed with PwC its independence. The Audit Committee requires prior approval of all non-audit services provided by PwC. In 2010, PwC was engaged for tax compliance work. The Audit Committee has discussed with management and PwC such other matters and received such assurances from them as the Audit Committee deemed appropriate.

NORTHWEST FCS

Jim Farmer

2010 ANNUAL REPORT

N OR THW ES T

FARM

CR E D I T

SE R V I CE S,

AC A

2010 Financial Highlights Despite challenging economic and credit conditions, we are pleased to report solid financial results

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

for 2010. Our strong balance sheet and earnings provide a solid foundation for 2011, allowing us to serve our customers’ credit and financially related services needs. Highlights include: •

Net income for the year was $150.1 million — up 41.5 percent from 2009 and more than projected in the 2010 Business Plan. This increase was driven by a rise in net interest income over 2009, achieved largely from decreased funding costs and a reduced provision for loan loss expense when compared to the prior year.

The following commentary is a review of the financial condition and results of operations of Northwest Farm Credit Services, an Agricultural Credit Association, and its wholly-owned

•

Favorable earnings and a strong capital position allowed us to return a cash patronage

subsidiaries (Northwest FCS). The commentary should be read in conjunction with the

distribution of $36.0 million and represented a return of approximately 50 basis points for

accompanying financial statements and notes. Stockholder investments in Northwest FCS

the majority of our eligible customers based on their average loan balances for 2010.

are materially affected by the financial condition and results of operations of CoBank, ACB

•

relatively unchanged in 2010, ending the year with gross loans and accrued interest at $8.4

(Bank). To obtain a free copy of the CoBank Annual Report to Stockholders, please contact

billion, a 2 percent increase from year-end 2009.

us at Northwest Farm Credit Services, ACA, P.O. Box 2515, Spokane, Washington 99220-2515, call (509) 340-5300, or access CoBank’s website at www.cobank.com. Dollar amounts are in thousands unless otherwise stated. The financial statements were prepared under the oversight of the Audit Committee.

After several consecutive years of loan volume growth, our loan portfolio volume remained

•

Asset quality, as measured by loans in the two highest classifications, remained consistent in 2010 at 92.5 percent.

Commodity Review and Outlook The following reflects the economic conditions for various key commodities and products:

Forward-Looking Statements Certain statements contained in this report that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Our actual results may differ materially from those included in the forward-looking statements that relate to plans, projections, expectations, and intentions. Forward-looking statements are typically identified by words such as “believe,”“expect,”“anticipate,”“intend,”“estimate,”“plan,”“project,”“may,”“will,”“should,” “would,”“could” or similar expressions. Although we believe the information expressed or implied in such forward-looking statements is reasonable, no assurance can be given that such projections and expectations will be realized or the extent to which a particular plan, projection, or expectation may

As 2010 came to a close, dairy producers’ financial performance varied, with some reporting profits and others continued losses. Nationally, 2010 closed with 9.11 million milk cows and total milk production of 192.7 billion pounds. Although year-over-year milk cow numbers were down 1 percent, average milk production per cow of 21,150 pounds was 2.8 percent higher. Consequently, total milk production increased 1.8 percent in 2010. Higher feed costs are expected to slow growth in milk production per cow in 2011. Nevertheless, total U.S. milk production in 2011 is forecast to increase 1.8 percent to 196.1 billion pounds. Higher milk production is supported by a slight increase in cow numbers and a 1.3 percent

be realized. These forward-looking statements are based on current knowledge and are subject to

increase in milk production per cow. This slight increase in milk production along with strong

various risks and uncertainties, including, but not limited to: fluctuations in the agricultural, energy,

domestic and international demand should provide milk prices some support in 2011.

international and leasing industry sectors; United States and global economic conditions; sovereign or regulatory actions; the level of interest rates; changes in assumptions underlying the valuations

The cattle industry finished 2010 with one of its strongest price years in recent history.

of financial instruments; changes in estimates underlying the allowance for credit losses; economic

The calf market reached all-time highs in December when 550-pound steers averaged $130 per

conditions and credit performance of the loan portfolio, growth and seasonal factors; the effect of

cwt. High prices are likely to continue and some forecasts predict even higher prices in 2011.

banking and financial services reforms; possible amendments to, and interpretations of, risk-based

While volatility remains a concern in the down economy, basic supply factors look positive for

capital guidelines and reporting instructions; the ability of states to adopt more extensive consumer

2011 and demand continues to find strength at home and abroad.

privacy protections through legislation or regulation; the resolution of legal proceedings and related matters; and nonperformance by counterparties to derivative positions.

NORTHWEST FCS

Beef production rebounded in 2010, but stronger production is due to increased placement of

heifers in feedlots, moving cattle at lower weights, and improved feeding conditions during the

percent in 2010. In Idaho, production was down 13.6 percent, while production was down 6.3

second half of the year. The tightest cattle supplies of the decade are projected for 2011 and

percent and 6.5 percent in Washington and Oregon, respectively. At 114 million cwt, Idaho’s

2012. With the herd down nearly 2.5 million head from 10 years ago and continued high heifer

production is forecast at the lowest level since 1989. Although smaller in size than prior years,

placements through 2010, the calf crops of 2011 and 2012 will likely be smaller. Tighter beef

potatoes’ quality and storability are excellent.

supplies in 2011 will likely continue to support the trend of higher retail prices. Nationally, the U.S. 2010 fall potato crop is estimated at 360.0 million cwt, the smallest since The recent improvement in the Northwest forest products industry indicates that the current downturn may have bottomed in 2009. Supported by strong export

1990. Lower production is attributed to 4 percent fewer harvested acres and average or below average yields in many states.

levels, sales in the fourth quarter beat most projections from both a volume and pricing standpoint. Slow recovery in the housing market and low inventories in the supply chain, though, set the stage for continued volatility.

The Northwest’s December 1 storage report indicates a 105.3 million box fresh apple crop for the 2010/2011 marketing season. That compares to 103.0 million boxes last year, and to the 108.3 million box record set in 2008/2009.

Given mill curtailments and closures, along with an uptick in exports, lumber and panel prices showed strength in mid-2010. Increasing demand for wood products in China, coupled with

A cool, wet spring resulted in a greater percentage of smaller apples this year, and other condi-

a favorable exchange rate has resulted in large percentage surges in North American lumber

tion issues such as wind and hail damage, bitter pit (tissue damage), and russeting (discolored,

exports to China. While exports from the U.S. to China represent just 1 percent of total U.S

slightly rough skin) affected the general quality of the crop. O verall, production of Red Delicious

production, Canadian exports to China represent nearly 13 percent of Canada’s soft-wood

is down 14 percent from last year, though increases in Gala, Golden Delicious, and Honeycrisp

lumber production.

largely offset the decline. In November, critical temperatures across the Northwest may have caused damage to next year’s fruit buds and possibly spur damage in some orchards.

Northwest wheat growers are optimistic entering 2011, sustained by wheat markets bolstered by the world markets’ concern over supplies of high quality milling wheat. Strong

According to the Washington Growers Clearing House, apple movement exceeds the last two

wheat prices, though, are tempered by increasing input prices. Winter wheat crop conditions

seasons, and the season-to-date average price of above $20 per box is higher than last year

throughout the Northwest are described as good to excellent. Damages from severe winter

for the same time period. Many in the industry are bullish on prices going into 2011 due to

weather in late November were largely mitigated by widespread snow cover. In December,

decreased supply in the world market and tighter than usual supplies of higher quality apples

reoccurring snow storms continued to insulate Northwest winter wheat crops.

particularly Fuji and Granny Smith in the Northwest.

The 2010/2011 USDA season-average price received by farmers is projected to range from $5.30

Nursery sales languished in a marketplace struggling to recover from the toughest

to $5.70 per bushel. Although wheat prices are currently higher, season-average wheat prices

economic recession in decades. Oregon nursery sales fell to $740 million in 2009, levels not

are limited by heavy early-season marketing and forward sales. The 2010/2011 season-average

seen since 2002. Results of a survey, completed by us this year, indicate another 7 to 10 percent

price is higher than the 2009/2010 average of $4.87 per bushel, but lower than the record 2008/

decline in sales for 2010 that will wipe out virtually all the growth in sales volume this decade.

2009 price of $6.78 per bushel. Globally, volatile market conditions suggest world wheat supply-

The only exception appears to be the greenhouse market segment that showed modest gains.

demand uncertainty for 2011 and 2012.

The “average” nursery in our peer study of financial benchmarks showed operating losses in 2010 for the third consecutive year.

Potato growers are optimistic entering 2011. Producers’ optimism is supported by strong potato markets, strengthened by a smaller 2010 crop and prices at or above $8 per

The Pacific Northwest hay market is experiencing strong prices owing to a severe

cwt. Competition for acres from substitute crops like wheat, malt barley, and corn also position

shortage of high quality hay. Cool, wet weather hindered crop growth and untimely rains caused

potato growers favorably when negotiating contracts with processors. Strong potato prices are

considerable damage to first and fourth cutting hay in Washington and Idaho. Dairies taking

likely to be partially offset by increasing input prices (e.g. fuel and fertilizer) in 2011.

advantage of positive cash flows and exporters seeking to secure adequate inventories bid up prices in the third and fourth quarters of 2010. Alfalfa prices are also supported by higher wheat

Year-over-year potato production in Idaho, Washington, Oregon, and Montana was down 10

and corn prices this year.

2010 ANNUAL REPORT

Looking forward, the Northwest hay industry is in an uncertain situation heading into 2011. In an

of the market area. Significant declines in pasture values however are not foreseen due to the

average year, expectations for low levels of carryover hay would be bullish for new crop prices

recent increase in sales volume hinting at signs of recovery.

and a precursor to additional hay acres in the spring. However, with the expected volatility in the dairy industry through the first half of 2011, and strong prices for alternative crops, there is little

Loan Portfolio

incentive for hay growers to increase alfalfa production. Lower supplies will put a floor on hay

Gross loans and accrued interest for the past three years are presented in the following table:

markets, while the prices dairies are able to pay and prices exporters are willing to pay will put a ceiling on how high hay prices can go. This past year was fairly stable for most ethanol producers. However, with continued price pressure from the input perspective (primarily corn), ethanol margins have tightened in recent weeks, with crush margins during the week of December 27, 2010 running approximately 8 cents per gallon, which is down from roughly 25 cents to 30 cents per gallon about six to eight weeks ago. Corn availability and pricing will be particularly important in 2011. Similar to other segments of the economy, buyers of rural real estate remain cautious. This cautionary attitude in combination with difficulties associated with obtaining adequate financing has led to a decline in sales activity in the rural residential market. Additionally, the sluggish economy in combination with relatively high unemployment has contributed to the lingering weakness in the rural residential market segment. Even with the limited number of sales, there is evidence of decreasing values in the rural home market

The quality of the portfolio, while still strong, reflects credit deterioration in those agricultural sec-

throughout many areas of the Northwest. The performance of this portfolio has been strong

tors that continue to be impacted by volatility in commodity and other input prices, such as dairy,

relative to the industry, and we continued to have low delinquency rates throughout 2010.

as well as those borrowers impacted by the overall downturn in the general U.S. economy. The following table reflects activity within the nonaccrual loan portfolio:

Productive agricultural land is expected to continue to be stable in many areas of the Northwest in the foreseeable future. Supply in the agricultural market remains relatively low with good quality reasonably priced properties generating a significant amount of interest. A number of producers have solid financial positions as well as the ability and desire to purchase land if offered at a market supported price. Strong demand and the Federal Reserveâ&#x20AC;&#x2122;s monetary policy have contributed to elevated prices in many commodity markets. This in combination with lower than expected grain supplies has led to increases in farm incomes. These trends are expected to continue in the near term. The combination of these factors and favorable interest rates point to near term stability in many agricultural markets. There are a couple of exceptions, however. One example of this would be in parts of the Northwest where land values are heavily influenced by distressed commodities such as dairy and those with ties to development in the housing industry. Some industries

As of December 31, 2010, nonaccrual loans that were current as to principal and interest install-

have seen significant adversity in the past few years and there is a strong possibility that land

ments totaled $204,702 representing 74.2 percent of the nonaccrual loan portfolio compared

value could drop in these areas if producers need to sell. Second, declines in pasture values

to $198,161 representing 73.2 percent of the nonaccrual loan portfolio at December 31, 2009,

have been noted predominately related to the reduction of recreational influences in much

and $64,112 representing 78.7 percent of the nonaccrual loan portfolio at December 31, 2008.

NORTHWEST FCS

Allowance for Credit Losses

Results of Operations

The allowance for credit losses is comprised of the allowance for loan losses and the reserve

Our net income for the year ended December 31, 2010, was $150,064, compared to $106,085 for

for unfunded lending commitments. The allowance for credit losses is our best estimate of

2009 and $124,374 for 2008. The following table provides detail of changes in the components

the amount of probable losses inherent in our loan portfolio at the balance sheet date. The

of our net income.

allowance for credit losses is determined based on a periodic evaluation of the loan portfolio and unfunded lending commitments, which generally considers types of loans, credit quality, specific industry conditions, general economic and political conditions, and changes in the character, composition, and performance of the portfolio, among other factors. We utilize historical charge-off rates for various pools as a factor in determining the allowance for loan losses. Effective the third quarter of 2009, we completed a review of our allowance for credit losses methodology. This review was undertaken to determine if the existing methodology was responsive enough given the rapid market changes seen in specific agriculture sectors. Based on this study, we refined the methodology to better reflect current market conditions and risks inherent in the portfolio. The refinement in the allowance methodology did not have a significant impact on the level of our risk bearing capacity, generally referred to as “risk funds” (as defined by FCA regulation). In accordance with generally accepted accounting principles, we have maintained a contingency loss on unfunded commitments. The contingency loss reflects our best estimate

Net income was $43,979 higher in 2010 compared to 2009. Net interest income increased $16,610 primarily due to improved spreads resulting from decreased funding costs. The improvement in spread resulted from callable debt being replaced by both new debt issued and floating debt repricing at a lower rate of interest. Loan pricing compared to the underlying cost of funds also

of losses inherent in lending commitments made to customers but not yet disbursed upon.

improved due to increased risk in selected commodities and market conditions. Change in net

Factors such as the likelihood of disbursements and the likelihood of losses given disburse-

interest income due to the change in the balance sheet volume also affected the net interest

ment were utilized in determining this contingency. This reserve is reported as a liability on

income but to a lesser extent as a result of decreased loan demand. Also contributing to the

the balance sheet and totaled $7,000 at December 31, 2010, 2009, and 2008.

increase in net income was a decrease in provision for loan losses of $16,325. The provision for loan losses in 2010 was due to the challenges facing certain agricultural sectors, primarily our dairy

The allowance for loan losses (AFLL) increased $15,000 from $96,000 at December 31, 2009

portfolio. Uncertainty remains within the industry based on a combination of milk prices and feed

to $111,000 at December 31, 2010. The allowance for loan losses doubled from $48,000 at

costs. Noninterest income increased $9,545 primarily due to $9,312 in refunds from the Farm Credit

December 31, 2008, to $96,000 at December 31, 2009.

System Insurance Corporation (Insurance Corporation) related to the Farm Credit Insurance Fund (Insurance Fund). As described in Note 1 to the Consolidated Financial Statements, “Organization

Specific loan loss reserves at December 31, 2010, 2009, and 2008 totaled $32,380, $52,270, and $8,684, respectively. The decrease in the specific loan loss reserve is primarily due to charge-offs taken this past year on loans with specific reserves. Coverage of the AFLL, as a percentage of certain key loan categories, is presented in the next table:

and Operations,” when the Insurance Fund exceeds the statutory 2.0 percent secure base amount, the Insurance Corporation evaluates the insurance premium assessment rate for Farm Credit System banks and may refund excess amounts. The Insurance Fund ended 2009 above the secure base amount, and consequently in the first quarter of 2010, the Insurance Corporation distributed to Farm Credit entities the excess amount generated in 2009, as well as excess amounts from 2003. Operating Expenses decreased by $7,185 in 2010 compared to 2009. The decrease resulted from reduced insurance premium assessment rates on our Insurance Fund and a decrease in employee benefits. The decrease in employee benefits was primarily due to a reduction in net period benefit costs on the defined benefit pension plan. These positive variances were slightly offset by higher expenses in salaries, purchased services and public and member relations. The increase in salaries

2010 ANNUAL REPORT

was primarily due to additional employees. Income tax expense was $5,588 higher than in the

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

previous year primarily due to increased income from our taxable entity.

assets and interest-bearing liabilities between the years ended December 31, 2010, and 2009 and between the years ended December 31, 2009, and 2008 are presented in the following table:

Net income for 2009 was lower than net income in 2008. As illustrated in the previous table, there were significant changes in the components of net income. The decline primarily resulted from increases in the provision for loan losses of $60,142. These increases were primarily due to credit deterioration in agricultural sectors that continue to be impacted by volatility in commodity prices including dairy, poultry, swine, cattle, and ethanol. Another significant factor negatively impacting net income when compared to the previous year was higher operating expenses of $14,992. This increase was attributable to higher employee benefits of $11,083 and statutory insurance fund premiums assessed by the Farm Credit System Insurance Corporation of $3,083. Employee benefit costs increased primarily due to increases in defined benefit pension expenses resulting from a decrease in the expected return on pension plan assets and to increased amortization of past actuarial plan losses. Our net interest income was higher than the previous

Liquidity and Funding Sources

year due to an increase of 0.43 percent in spread in response to evolving credit risk and market

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

conditions. Also contributing to the net interest income was an increase in average earning

“Note payable” on the Consolidated Balance Sheet. As described in Note 6 to the Consolidated

assets when compared to 2008. Noninterest income increased $9,621 due to increased crop

Financial Statements, “Note Payable to CoBank, ACB,” this direct loan is governed by a general

insurance commissions driven by higher commodity prices and overall growth in our insurance

financing agreement and is collateralized by a pledge of substantially all of our assets and is also

related services of $5,924, patronage dividends of $3,219, and loans fees of $2,498. Income tax

subject to regulatory borrowing limits. The general financing agreement includes financial and

expense was $8,350 lower than in the previous year due primarily due to the losses incurred in our short term lending portfolio. Information regarding the average daily balances and average rates earned and paid on our portfolio during 2010, 2009, and 2008 are presented in the following table:

credit metrics that if not maintained can result in increases to our funding costs. The general financing agreement also requires us to comply with Farm Credit Administration regulations regarding liquidity. To meet this requirement, we are allocated a share of CoBank’s liquid assets. We are currently in compliance with the general financing agreement and do not foresee significant issues with obtaining funding or maintaining liquidity. We have a secondary source of liquidity and funding through a line of credit with Bank of America. A portion of the line of credit is used to support letters of credit issued on Industrial Revenue Bonds. This portion of the line of credit is for $55,000 with $16,081 committed at December 31, 2010. The remaining portion of the line of credit is for $70,000 and is intended to provide liquidity for disaster recovery or other emergency situations. At December 31, 2010, no balances were outstanding on this portion of the line of credit.

Asset/Liability Management In the normal course of lending activities, we are subject to interest rate risk. Our asset/liability management objective is monitored and managed within interest rate risk limits designed to target reasonable stability in net interest income over an intermediate planning horizon and to preserve a relatively stable market value of equity over the long-term. Mismatches and exposure in interest rate repricing and indices of assets and liabilities can arise from product structures, customer activity, capital re-investment, and liability management. While we actively manage interest rate risk

NORTHWEST FCS

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

Given some of the inherent weaknesses with interest rate gap analysis, simulation models are

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

used to develop additional interest rate sensitivity measures and estimates. The assumptions

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

used to produce anticipated results are periodically reviewed and the models are tested to

priced and structured loan products for our customersâ&#x20AC;&#x2122; benefit and fund these products with a

help ensure reasonable performance. Various simulations are produced for net interest income

blend of retained earnings and debt obligations.

and the market value of equity. These simulations help us assess interest rate risk and make adjustments as needed to the products we offer and the related funding strategies.

The interest rate gap analysis shown in the following table presents a comparison of interestearning assets and interest-bearing liabilities in defined time segments at December 31, 2010.

Our interest rate risk management Board policy establishes limits for changes in net inter-

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

est income and market value sensitivities. These limits are measured and reviewed by ALCO

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

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

this analysis can be limited given other factors such as the differences between interest rate indi-

net interest income and the market value of equity are a negative 15 percent change given

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

a parallel and instantaneous shock of interest rates up and down of 2 percent. If the three-

time, and financial features included in loans and the respective funding that can impact future

month Treasury bill interest rate is less than 4 percent, then the downward shock is equal to

earnings and market value.

one-half of the three-month Treasury rate. The general financing agreement with CoBank also uses these simulation results to assess our interest rate risk position and whether corrective action is necessary.

The up 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 2008-2010, the 1 and 2 percent parallel and instantaneous downward shock scenarios cannot be obtained. The downward rate shock in the preceding table was 0.063 percent. As of December 31, 2010, all interest rate risk-related measures were within approved policy limits, general financing agreement requirements, and management guidelines.

Membersâ&#x20AC;&#x2122; Equity We have a capitalization objective to build and retain adequate capital for our continued financial viability and to provide for growth necessary to meet the needs of our customers on competitive terms. 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 swap and other transactions. These transactions protect us against credit losses and enhance our capital ratios. These transactions amortize down so their financial benefits diminish over time.

2010 ANNUAL REPORT

Total membersâ&#x20AC;&#x2122; equity increased $120,482 (9.9 percent) from December 31, 2009 to December 31, 2010. The increase in our capital was primarily due to earnings of $150,064 and a decrease in accumulated other comprehensive loss of $6,051, partially offset by patronage payable of $35,958. The following ratios and percentages illustrate the trend of our capital base over the last three years:

Our permanent capital ratio, as determined by Farm Credit Administration regulations, was 13.2 percent at December 31, 2010, compared to 12.2 percent at the end of 2009 and 12.7 percent at the end of 2008. The regulatory minimum permanent capital ratio is 7.0 percent. Our core surplus ratio, as determined by Farm Credit Administration regulations, was 13.0 percent at December 31, 2010, compared to 12.1 percent at the end of 2009 and 12.3 percent at the end of 2008. The regulatory minimum core surplus ratio is 3.5 percent. Our total surplus ratio was 13.0 percent at December 31, 2010, compared to 12.1 percent at the end of 2009 and 12.5 percent at the end of 2008. The regulatory minimum total surplus ratio is 7.0 percent. Management is not aware of any reasons why our regulatory capital requirements would not be met in 2011. N OR TH W ES T

FARM

Phil DiPofi President and CEO March 7, 2011

NORTHWEST FCS

CR E D I T

SE R V I CE S,

AC A

Tom Nakano Executive Vice President-CFO March 7, 2011

Drew F. Eggers Chair of the Board March 7, 2011

REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Northwest Farm Credit Services: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in members’ equity and of cash flows present fairly, in all material respects, the financial position of Northwest Farm Credit Services, ACA and its subsidiaries (the Association) at December 31, 2010, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Association maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established

A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

of the Treadway Commission (COSO). The Association’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Report on Internal Control over Financial Reporting appearing in the Association’s 2010 Annual Report to Stockholders. Our responsibility is to express an opinion

March 7, 2011

on these financial statements and on the Association’s internal control over financial reporting based on our integrated audit. We conducted our integrated audit in accordance with generally accepted auditing standards established by the Auditing Standards Board (United States) and in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the integrated audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our integrated audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our integrated audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our integrated audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our integrated audit provided a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

2010 ANNUAL REPORT

NORTHWEST FCS

2010 ANNUAL REPORT

NORTHWEST FCS

2010 ANNUAL REPORT

N OR TH W ES T

FARM

CR E D I T

SE R V I CE S,

AC A

The Farm Credit Act established the Farm Credit System Insurance Corporation (Insurance Corporation) to administer the Farm Credit Insurance Fund (Insurance Fund). The Insurance Fund

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except as noted)

is required to be used (1) to ensure the timely payment of principal and interest on Systemwide debt obligations (Insured debt), (2) to ensure the retirement of protected borrower capital at par or stated value, and (3) for other specified purposes. The Insurance Fund is also available for the discretionary uses by the Insurance Corporation of providing assistance to certain troubled System institutions and to cover the operating expenses of the Insurance Corporation. Each

NOTE 1 > Organization and Operations O R GA N IZATION Northwest Farm Credit Services, ACA and its subsidiaries, Northwest Farm Credit Services, FLCA (the Federal Land Credit Association (FLCA)) and Northwest Farm Credit Services, PCA (the Production Credit Association (PCA)), (collectively called Northwest FCS) is a member-owned cooperative that provides credit and financially related services to or for the benefit of eligible customers/stockholders primarily in the states of Alaska, Idaho, Montana, Oregon, and Washington.

System Bank has been required to pay premiums, which may be passed on to the associations, into the Insurance Fund based on its annual average adjusted outstanding insured debt until the monies in the Insurance Fund reach the “secure base amount”, which is defined in the Farm Credit Act as 2.0 percent of the aggregate insured obligations (adjusted to reflect the reduced risk on loans or investments guaranteed by federal or state governments) or such other percentage of the aggregate obligations as the Insurance Corporation in its sole discretion determines to be actuarially sound. When the amount in the Insurance Fund exceeds the secure base amount, the Insurance Corporation is required to reduce premiums, as necessary to maintain the Insurance Fund at the secure base amount. As required by the Farm Credit Act, as amended, the Insurance Corporation may return excess funds above the secure base amount to System institutions.

Northwest FCS is a lending institution of the Farm Credit System (the System), a nationwide system of cooperatively-owned banks and associations, which was established by Acts of

OPE R ATI ONS

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

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

Farm Credit Act of 1971, as amended (the Farm Credit Act). At December 31, 2010, the System was

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

comprised of four Farm Credit Banks, one Agricultural Credit Bank, and numerous associations.

provide, either directly or in participation with other lenders, credit, credit commitments, and related services to eligible customers. Eligible customers include farmers, ranchers, producers

CoBank, ACB (the Bank) and its related associations are collectively referred to as the CoBank

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

District. The Bank provides the majority of funding to associations within the District and is responsible for supervising certain activities of the District Associations. The District consists of

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

the Bank and four ACA parent companies, each having two wholly-owned subsidiaries, a FLCA

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

and a PCA.

financial management services.

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

Upon request, stockholders of Northwest FCS will be provided with a free copy of CoBank’s

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

Annual Report to Stockholders. Northwest FCS’ financial condition may be impacted by factors

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

that affect CoBank. CoBank’s Annual Report to Stockholders discusses the material aspects

or operating purposes.

of its financial condition, changes in financial condition, and results of operations. In addition, the CoBank Annual Report identifies favorable and unfavorable trends, significant events,

Northwest FCS, along with other System associations, own Financial Partners, Inc., which provides

uncertainties, and the impact of activities of the Insurance Corporation. The lending and financial

technology and other operational services to its owners.

services offered by CoBank are described in Note 1 of CoBank’s Annual Report to Stockholders.

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

NOTE 2 > Summary of Significant Accounting Policies

System banks and associations. The FCA examines the activities of System associations to ensure their compliance with the Farm Credit Act, FCA regulations and safe and sound banking practices.

NORTHWEST FCS

The accounting and reporting policies of Northwest FCS conform with accounting principles

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

no impact on the Association’s financial condition and results of operations but resulted in

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

additional disclosures for the pension assets.

management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates are discussed in these

In June 2009, the FASB issued guidance on “Accounting for Transfers of Financial Assets,” which

footnotes, as applicable. Actual results may differ from these estimates.

amends previous guidance by improving the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about

The consolidated financial statements include the accounts of Northwest Farm Credit Services,

a transfer of financial assets; the effects of a transfer on its financial position, financial performance,

ACA, Northwest Farm Credit Services, FLCA, and Northwest Farm Credit Services, PCA. All sig-

and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets.

nificant inter-company transactions have been eliminated in consolidation. This guidance was effective January 1, 2010. This Statement must be applied to transfers RECE N TLY ISSUED O R A D O P T E D ACCO U N T I NG P R O NO UNC E ME NTS

occurring on or after the effective date. Additionally, the concept of a qualifying special

In July 2010, the Financial Accounting Standards Board (FASB) issued guidance on “Disclosures

purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying

about the Credit Quality of Financing Receivables and the Allowance for Loan Losses,” which is

special-purpose entities (as defined under previous accounting standards) should be evaluated

intended to provide additional information to assist financial statement users in assessing an

for consolidation by reporting entities on and after the effective date in accordance with the

entity’s credit risk exposures and evaluating the adequacy of the allowance for credit losses.

applicable consolidation guidance. If the evaluation results in consolidation, the reporting

Existing disclosures are amended to include additional disclosures of financing receivables

entity should apply the transition guidance provided in the pronouncement that requires

on a disaggregated basis (by portfolio segment and class of financing receivable) including

consolidation. Northwest FCS reviewed its loan participation agreements to ensure that

among others, a rollforward schedule of the allowance for credit losses from the beginning of

participations would meet the requirements for sales treatment and not be required to

the reporting period to the end of the period on a portfolio segment basis, with the ending

be consolidated. There was no impact to Northwest FCS’ financial condition and results of

balance further disaggregated on the basis of the method of impairment (individually or

operations upon adoption on January 1, 2010.

collectively evaluated). The guidance also calls for new disclosures including but not limited to credit quality indicators at the end of the reporting period by class of financing receivables, the

In June 2009, the FASB also issued guidance to improve financial reporting for those

aging of past due financing receivables, nature and extent of financing receivables modified as

enterprises involved with variable interest entities, which amends previous guidance

troubled debt restructurings by class and the effect on the allowance for credit losses. For non-

by requiring an enterprise to perform an analysis to determine whether the enterprise’s

public entities, the disclosures as of the end of a reporting period are effective for interim and

variable interest or interests give it a controlling financial interest in a variable interest

annual reporting periods ending on or after December 15, 2011. The disclosures about activity

entity. Additionally, an enterprise is required to assess whether it has an implicit financial

that occurs during a reporting period are effective for interim and annual reporting periods

responsibility to ensure that a variable interest entity operates as designed when determining

beginning on or after December 15, 2011. The early adoption of this Standard in 2010 did not

whether it has the power to direct the activities of the variable interest entity that most

have an impact on the Association’s financial condition or results of operations, but did result

significantly impact the entity’s economic performance.

in additional disclosures. This guidance was effective as of the beginning of each reporting entity’s first annual reporting In January 2010, the FASB issued guidance on “Fair Value Measurements and Disclosures,”

period that begins after November 15, 2009, for interim periods within that first annual

which is to improve disclosures about fair value measurement by increasing transparency

reporting period and for interim and annual reporting periods thereafter. Earlier application

in financial reporting. The changes will provide a greater level of disaggregated information

was prohibited. Northwest FCS’ credit default swap arrangements, as discussed in Note 3 –

and more effective disclosures of valuation techniques and inputs to fair value measurement.

Loans and Allowance for Loan Losses, are variable interest entities. However, Northwest FCS

The new disclosures and clarification of existing disclosures were effective for interim and

does not have a controlling interest in these variable interest entities, and therefore does not

annual reporting periods beginning after December 15, 2009, except for the disclosures about

meet the criteria for consolidation.

purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15,

C ASH

2010, and for interim periods within those fiscal years. The adoption of this Standard had

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

2010 ANNUAL REPORT

I N V ES TMENT SECUR IT I E S

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

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

that it would not otherwise consider.

investment programs approved by the Farm Credit Administration. These programs allow Northwest FCS to make investments that further the System’s mission to serve rural America.

In cases where a borrower experiences financial difficulties and Northwest FCS makes certain

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

monetary concessions to the borrower through modifications to the contractual terms of the

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

loan, the loan is classified as a restructured loan. If the borrower’s ability to meet the revised

premiums and accretion of discounts.

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

LOANS AND AL LO WAN C E F O R C R EDIT LO S S ES

Loans are charged-off at the time they are determined to be uncollectible.

Long-term real estate mortgage loans can have original maturities ranging up to 40 years, although the typical loan is 25 years or less. Substantially all short- and intermediate-term loans for agricul-

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

tural production or operating purposes have maturities of 10 years or less. Loans are carried at their

bined system risk rating guidance that incorporates a 14-point risk-rating scale to identify and

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

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

premiums or discounts. Loan origination fees and direct loan origination costs are capitalized, and

a period of time. Probability of default is the probability that a borrower will experience a de-

the net fee or cost is amortized over the life of the related loan as an adjustment to yield.

fault within 12 months from the date of the determination of the risk rating. A default is considered to have occurred if the lender believes the borrower will not be able to pay its obligation

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

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

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

estimate as to the anticipated economic loss on a specific loan assuming default has occurred

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

or is expected to occur within the next 12 months.

loans include nonaccrual loans, restructured loans, and loans past due 90 days or more and still accruing interest. A loan is considered contractually past due when any principal repayment

Each of the probability of default categories carries a distinct likelihood of default. There are

or interest payment required by the loan instrument is not received on or before the due date.

nine acceptable categories that range from a borrower of the highest quality to a borrower of

A loan shall remain contractually past due until it is formally restructured or until the entire

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

amount past due, including principal, accrued interest, and penalty interest incurred as the

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

result of past due status, is collected or otherwise discharged in full.

grows more rapidly as a loan moves from a “9” to other assets especially mentioned and grows significantly as a loan moves to a substandard level.

Loans are generally placed in nonaccrual status when principal or interest is delinquent for 90 days (unless adequately secured and in the process of collection) or circumstances indicate that

The allowance for loan losses is maintained at a level considered adequate by management

collection of principal and/or interest is in doubt. When a loan is placed in nonaccrual status, ac-

to provide for probable and estimable losses inherent in the loan portfolio. The allowance is

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

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

against the allowance for loan losses (if accrued in the prior year).

reversals of provisions for loan losses and loan charge-offs. The allowance is based on a periodic evaluation of the loan portfolio by management in which numerous factors are considered, in-

When loans are in nonaccrual status, the interest portion of payments received in cash are rec-

cluding economic conditions, loan portfolio composition, collateral value, portfolio quality, cur-

ognized as interest income if collection of the recorded investment in the loan is fully expected

rent production conditions, and prior loan loss experience. It is based on estimates, appraisals,

and the loan does not have a remaining unrecovered prior charge-off associated with it. O ther-

and evaluations of loans, which, by their nature, contain elements of uncertainty and impreci-

wise, loan payments are applied against the recorded investment in the loan. Nonaccrual loans

sion. The possibility exists that changes in the economy and its impact on borrower repayment

may be returned to accrual status when principal and interest are current, prior charge-offs have

capacity will cause these estimates, appraisals, and evaluations to change.

been recovered, the ability of the borrower to fulfill the contractual repayment terms is fully expected, and the loan is not classified “doubtful” or “loss”.

The allowance for loan losses is a valuation account used to reasonably estimate loan losses as of the financial statement date. Determining the appropriate allowance for loan losses balance

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

NORTHWEST FCS

involves significant judgment about when a loss has been incurred and the amount of that loss.

The determination of the allowance for loan losses is based on management’s current judg-

Amounts in excess of the related loan balance are presented in the Advance conditional

ments about the credit quality of its loan portfolio. A specific allowance may be established for

payments and other interest-bearing liabilities line in the accompanying Consolidated

impaired loans in accordance with applicable accounting guidance. Impairment of these loans

Balance Sheet. Advanced conditional payments are not insured. Interest is paid by

is measured based on the present value of expected future cash flows discounted at the loan’s

Northwest FCS on such accounts.

effective interest rate or, as practically expedient, at the loan’s observable market price or fair value of the collateral if the loan is collateral dependent.

E MPLOY E E BE NE FI T P L ANS The employees of Northwest FCS participate in its defined benefit retirement plan or its defined

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

contribution retirement plan. Enrollment in the defined benefit plan was curtailed in 1994.

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

Existing employees who elected to transfer and all new employees hired after December 31,

of disbursal and likelihood of losses given disbursement were utilized in determining this contingency.

1994, participate in the defined contribution plan. The defined benefit retirement plan uses the “Entry Age Normal Cost” actuarial method for funding purposes and the “Projected Unit Credit”

INV ESTM E N T IN CO BA N K, AC B

actuarial method for financial reporting purposes. Defined contribution retirement plan costs

Northwest FCS’ investment in CoBank is in the form of Class A stock. Accounting for this

are expensed as funded.

investment is on the cost plus allocated equities basis. Employees who participate in the defined benefit plan also participate in the defined benefit resOT H E R P R OP ER T Y O W N E D

toration plan. Each eligible employee whose retirement benefit under the defined benefit plan is

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

limited by Internal Revenue Code Sections 401(a) (17), 415 or any Code provision or government

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

regulations subsequently issued would receive a benefit if these programs are continued. Under

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

the present plan, the monthly benefit is equal to the difference between the participant’s actual

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

monthly retirement benefit payment under the defined benefit plan and the monthly retirement

value less cost to sell are reported as adjustments to the carrying amount of the asset, provided

benefit payment that would be payable to the participant under the defined benefit plan if the

that such adjusted value is not in excess of the carrying amount at acquisition. Income and

limitations of Internal Revenue Code Sections 401(a) (17), 415, or any code provision or govern-

expenses from operations and carrying value adjustments are included in other income or other

ment regulations subsequently issued, did not apply.

expense, in the Consolidated Statement of Income. All employees of Northwest FCS are eligible to participate in its thrift/deferred compensation P RE MI SES AND EQ UIP M E N T

plan (Thrift Plan) whereby employer contributions match a certain percentage of employee

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

contributions. Thrift Plan costs are expensed as funded.

cost. Depreciation is provided on the straight-line method over the estimated useful lives of the assets. Gains and losses on dispositions are reflected in current operations. Maintenance and repairs are charged to operating expense and improvements are capitalized.

Northwest FCS provides life insurance benefits to eligible retired employees who reached normal retirement age prior to December 31, 2006. Plan costs are expensed as funded. This benefit is no longer offered to employees who retire after December 31, 2006. The liability for

I NTA NGIBL E ASSETS

this benefit was transferred to an insurance company in 2008 in exchange for a cash settlement

Intangible assets are carried at cost less accumulated amortization. Amortization is provided

paid by Northwest FCS.

on the straight-line method over the estimated useful life of the intangible assets. The intangible assets are reviewed annually for impairment with any impairment charges recognized in

I NCOME TAX E S

operating expenses.

As previously described, Northwest Farm Credit Services, ACA operates through two wholly-owned subsidiaries. The Northwest Farm Credit Services, FLCA subsidiary is exempt from federal and

AD VAN CE D CO NDIT IO NA L PAYM ENTS

other income taxes as provided in the Farm Credit Act. Northwest Farm Credit Services, ACA and

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

its subsidiary, Northwest Farm Credit Services, PCA are subject to federal income tax and pay state

borrowers. To the extent the borrower’s access to such advance payments is restricted, the

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

advanced conditional payments are netted against the borrower’s related loan balance.

for tax treatment under Subchapter T of the Internal Revenue Code. Accordingly, under specified

2010 ANNUAL REPORT

conditions, they can exclude from taxable income amounts distributed as qualified patronage

D E R I VAT I V E IN S T RU M E N TS AND HEDGING ACTIVIT Y

refunds in the form of cash, stock, or allocated surplus. Provisions for income taxes are made only

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

on those earnings that will not be distributed as qualified patronage refunds.

(derivatives) that are principally used to manage interest rate and exchange rate risk on assets. Derivatives are recorded on the Consolidated Balance Sheet as assets and liabilities at fair value.

The ACA holding company conducts its business activities through two wholly owned subsidiaries. Long-term mortgage lending activities are operated through a wholly owned FLCA

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

subsidiary which is exempt from federal and state income tax. Short- and intermediate-term

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

lending activities are operated through a wholly-owned PCA subsidiary. Operating expenses

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

are allocated to each subsidiary based on estimated relative service. All significant transactions

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

between the subsidiaries and the parent company have been eliminated in consolidation.

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

Deferred taxes are provided on taxable income on the basis of a proportionate share of the

cash flows related to a forecasted transaction, changes in the fair value of the derivative will

tax effect of temporary differences not allocated in patronage form. A valuation allowance is

be deferred and reported in accumulated other comprehensive income (loss). The gains and

provided against deferred tax assets to the extent that it is more likely than not (over 50 percent

losses on the derivative that are deferred and reported in accumulated other comprehensive

probability), based on management’s estimate, that they will not be realized. The consideration

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

of valuation allowances involves various estimates and assumptions as to future taxable earnings,

variability of the cash flows of the hedged item. The ineffective portion of all hedges is recorded

including the effects of the expected patronage program, which reduces taxable earnings.

in current period earnings. For derivatives not designated as a hedging instrument, the related change in fair value is recorded in current period earnings.

Deferred income taxes have not been provided by Northwest FCS on patronage stock distributions received from the Bank prior to January 1, 1993, the adoption date of the FASB

Northwest FCS formally documents all relationships between hedging instruments and hedged

guidance on income taxes. Management’s intent is (1) to permanently invest these and other

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

undistributed earnings in the Bank, thereby indefinitely postponing their conversion to cash, or

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

(2) to pass through any distribution related to pre-1993 earnings to Northwest FCS’ stockholders

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

through qualified patronage allocations.

forecasted transactions. Northwest FCS also formally assesses (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been

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

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

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

those derivatives may be expected to remain highly effective in future periods.

through to Northwest FCS’ stockholders through qualified patronage allocations. Additionally, deferred income taxes have not been provided on the Bank’s post-1992 unallocated earnings. The

COMPR E H E NSI VE I NCOME ( LOS S )

Bank currently has no plans to distribute unallocated Bank earnings and does not contemplate

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

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

result of recognized transactions and other economic events of the period other than capital transactions with the stockholders. O ther comprehensive income (loss) refers to revenue,

PATR ON AGE RE FUNDS F R O M CO BA NK, AC B

expenses, gains and losses that under generally accepted accounting principles are recorded

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

as an element of stockholders’ equity but are excluded from net income. O ther comprehensive

distributes patronage 100 percent in cash for its direct lending business. The 2010 requirement

loss is comprised of adjustments related to Northwest FCS’ defined benefit pension and retiree

for capitalizing its participation loans sold to CoBank is 8.0 percent of Northwest FCS’ prior ten-

life plans and to adjustments related to its derivative contracts used to manage interest rate

year average balance of participations sold to CoBank. Under the current CoBank capital plan

and exchange rate risk on assets.

applicable to participations sold, patronage from CoBank related to participations sold is paid 65 percent cash and 35 percent Class A stock. The capital plan is evaluated annually by CoBank’s

FAI R VALU E ME ASU R E ME N TS

Board and management and is subject to change.

The FASB guidance defines fair value, establishes a framework for measuring fair value, and

NORTHWEST FCS

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

NOTE 3 > Loans and Allowance for Loan Losses

be used to measure fair value: Northwest FCS’ portfolio is comprised of a wide array of commodities and product offerings. In Level 1 – Quoted prices in active markets for identical assets or liabilities that the reporting

order to effectively serve this market, Northwest FCS has specialized staff and financial products

entity has the ability to access at the measurement date. Level 1 assets and liabilities include

for these various markets and commodities. Purchased loans of $1,721,370, $1,722,084, and

debt and equity securities and derivative contracts that are traded in an active exchange

$1,791,026 at December 31, 2010, 2009, and 2008, respectively, are included in the next three

market, as well as certain U.S. Treasury, other U.S. Government and agency mortgage-backed

tables pertaining to loan volume. A summary of loans follows:

debt securities that are highly liquid and are actively traded in over-the-counter markets. Also included in Level 1 are assets held in trust funds, which relate to amounts in a deferred compensation and a supplemental retirement plan. The trust funds include investments that are actively traded and have quoted net asset values that are observable in the market place. Pension plan assets that are invested in equity securities, including mutual funds, and fixedincome securities that are actively traded are also included in Level 1. Level 2 – Observable inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly. Level 2 inputs include the following: (a) quoted prices for similar assets or liabilities in active markets; (b) quoted prices for identical or similar assets or liabilities in markets that are not active so that they are traded less frequently than exchange-traded instruments, the prices are not current or principal market information is not released publicly; (c) inputs other than quoted prices that are observable such as interest rates and yield curves, prepayment speeds, credit risks and default rates and (d) inputs derived principally from or corroborated by observable market data by

Northwest FCS’ concentration of credit risk in various agricultural commodities and industries is shown

correlation or other means. This category generally includes certain U.S. Government and

in the following table. While the amounts represent Northwest FCS’ maximum potential credit risk as it

agency mortgage-backed debt securities, corporate debt securities, and derivative contracts.

relates to recorded loan principal, a substantial portion of Northwest FCS’ lending activities is collateral-

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

ized and exposure to credit loss associated with lending activities is reduced accordingly. An estimate

mortgage-backed securities are reported in Level 2.

of the credit risk exposure is considered in the determination of the allowance for loan losses.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities are considered Level 3. These unobservable inputs reflect the reporting entity’s own assumptions about assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments, retained residual interests in securitizations, assetbacked securities, highly structured or long-term derivative contracts, certain loans and other property owned. Pension plan assets such as certain mortgage-backed securities that are supported by little or no market data in determining the fair value are included in Level 3. The fair value disclosures are presented in Note 9, Note 12, and Note 14.

2010 ANNUAL REPORT

The amount of collateral obtained, if deemed necessary upon extension of credit, is based on

Commitments to lend additional funds to debtors whose loans were classified as impaired at

managementâ&#x20AC;&#x2122;s credit evaluation of the borrower. Collateral held varies, but typically includes

December 31, 2010, totaled $20,479.

farmland and income-producing property, such as crops and livestock, as well as inventories and receivables. Long-term real estate loans are secured by first liens on the underlying

Nonperforming assets, including related interest, and related credit quality statistics are as follows:

real property. Federal regulations state that long-term real estate loans are not to exceed 85 percent (97 percent if guaranteed by a government agency) of the propertyâ&#x20AC;&#x2122;s appraised value. However, a decline in a propertyâ&#x20AC;&#x2122;s market value subsequent to loan origination or advances, or other actions necessary to protect the financial interest of Northwest FCS in the collateral, may result in loan to value ratios in excess of the regulatory maximum. Loan volume by state at December 31, follows:

Impaired loans are loans for which it is probable that all principal and interest will not be collected according to the contractual terms. The following table presents information relating to impaired loans:

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

NORTHWEST FCS

The following table provides an age analysis of past due loans and accrued interest as of December 31, 2010:

Note: The recordedinvestment inthe receivable is the face amount increasedor decreasedby applicable accruedinterest andunamortizedpremium, discount, finance charges, or acquisitioncosts and may alsoreflect aprevious direct write-downof the investment.

Additional impaired loan information is as follows:

2010 ANNUAL REPORT

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

To mitigate the risk of loans being placed in nonaccrual status, Northwest FCS has entered into long-term standby commitments to purchase agreements with the Federal Agricultural Mortgage Corporation (Farmer Mac). The agreements, which are effectively credit guarantees that will remain in place until the loans are paid in full, give Northwest FCS the right to sell the loans identified in the agreements to Farmer Mac after four months of delinquency. Loans and related accrued interest sold to Farmer Mac at December 31, 2010, 2009, and 2008, were $200, $0, and $0, respectively. The balance of the loans under the long-term standby commitments was $78,903, $101,763, and $129,583 at December 31, 2010, 2009, and 2008, respectively. Fees for such commitments totaled $415, $525, and $676 for the years ended December 31, 2010,

A summary of the changes in the allowance for credit losses and the ending balance of loans and accrued interest outstanding are as follows:

2009, and 2008, respectively. These amounts are classified as noninterest expense. During August 2007, Northwest FCS entered into a credit default swap with Mt. Spokane 2007-A LLC (2007 LLC). The balance of the loans and accrued interest under the credit default swap was $663,426, $757,824 and $848,734 at December 31, 2010, 2009, and 2008, respectively. 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. However, the 2007 LLC is not required to pay Northwest FCS until the Retained First Loss Notional Amount held by Northwest FCS is reduced to zero. In addition to loss events, proportionate reductions in the Retained First Loss Notional Amount will occur due to reductions of the Aggregate Notional Amount of the Reference obligations associated with non-loss events such as repayment of loan principal. The balance of the Retained First Loss Notional Amount at December 31, 2010, was $3,912. The credit default agreement will remain in place over the life of the loans under the credit default swap. The maximum amount of losses the 2007 LLC will be required to pay under the credit default swap as of December 31, 2010, is $25,425. As of December 31, 2010, $233 of losses have been incurred by Northwest FCS. Northwest FCS capitalized costs relating to the establishment of the credit default swap of $1,290. These capitalized costs are included in other assets and are amortized over the expected remaining life of the loans under the agreement. Fees related to the credit default swap are paid based on the volume of loans under the agreement over the life of the agreement. Fees and the amortization of capitalized costs of $2,009, $2,145 and $2,873 for the years ended December 31, 2010, 2009 and 2008, respectively, are classified as noninterest expense.

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

During June 2004, Northwest FCS entered into a credit default swap with Mt. Spokane 2004-A LLC (2004 LLC). The balance of the loans under the credit default swap was $243,944, $293,446, and $337,876 at December 31, 2010, 2009, and 2008, respectively. 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. The credit default swap agreement will remain in place over

NORTHWEST FCS

the life of the loans under the credit default swap. The maximum amount of losses the 2004

obligations fully guaranteed as to timely payment of principal and interest by, the United

LLC will be required to pay under the credit default swap as of December 31, 2010, is $21,587.

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

As of December 31, 2010, $259 of losses have been incurred by the 2004 LLC. Northwest FCS

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

capitalized costs relating to the establishment of the credit default swap of $2,314. These

of America. Eligible securities, however, will not include “real estate mortgages” (or interest

capitalized costs are included in other assets and are amortized over the expected remaining

therein) as defined in Section 7701(i) of the Internal Revenue Code and the accompanying

life of the loans under the agreement. Fees related to the credit default swap are paid based

United States Treasury Regulations. Management has evaluated these variable interest

on the volume of loans under the agreement over the life of the agreement. Fees and the

entities and concluded that they are not subject to consolidation.

amortization of capitalized costs of $996, $1,298 and $1,827 for the years ended December 31, 2010, 2009, and 2008, respectively, are classified as noninterest expense.

NOTE 4 > Investment in CoBank, ACB

During 2002, Northwest FCS entered into a credit default swap with Mt. Spokane Trust 2002-A

At December 31, 2010, Northwest FCS’ investment in CoBank is in the form of Class A stock with a par

(Trust). Pursuant to the credit default swap, following the occurrence of a known loss, the

value of $100 per share. Northwest FCS is required to own stock in CoBank for two purposes. One,

Trust will be required to pay an amount to Northwest FCS equal to the principal amount of the

to capitalize its direct loan from CoBank and two, to capitalize participation loans sold to CoBank.

defaulted loan plus covered interest less any recoveries. The credit default swap agreement

The current requirement for capitalizing its direct loan from CoBank is 4.0 percent of Northwest FCS’

will remain in place over the life of the loans under the credit default swap. The maximum

prior year average borrowings. If the actual stock investment exceeds the required stock investment,

amount the Trust will be required to pay under the credit default swap as of December 31,

then CoBank compensates Northwest FCS for any excess stock invested. If the actual stock invest-

2010, is $8,267. As of December 31, 2010, $26 of losses have been incurred by the Trust. The

ment is less than the required stock investment, then Northwest FCS is required to purchase the

balance of the loans under the credit default swap was $93,869, $120,931, and $154,107 at

shortfall amount. CoBank distributes patronage for its direct lending business 100 percent in cash.

December 31, 2010, 2009, and 2008, respectively. Northwest FCS capitalized costs relating to

The 2010 requirement for capitalizing its participation loans sold to CoBank is 8.0 percent of North-

the establishment of the credit default swap of $2,543. These capitalized costs are included

west FCS’ prior ten-year average balance of participations sold to CoBank. Under the current CoBank

in other assets and are amortized over the expected remaining life of the loans under the

capital plan applicable to participations sold, patronage from CoBank related to participations sold

agreement. Fees related to the credit default swap are paid based on the volume of loans

is paid 65 percent cash and 35 percent Class A stock. The capital plan is evaluated annually by Co-

under the agreement over the life of the agreement. Fees and the amortization of capitalized

Bank’s board and management and is subject to change.

costs of $488, $602, and $744 for the years ended December 31, 2010, 2009, and 2008, respectively, are classified as noninterest expense.

Patronage income received from CoBank is recorded on the accrual basis based on estimated amounts. The difference between the estimated accrual and the actual patronage received is re-

Mt. Spokane Trust 2002-A and Mt. Spokane 2004-A, LLC are variable interest entities

flected in noninterest income in the year received. Northwest FCS recognized patronage income of

created by Bank of America to acquire eligible securities, which will be used as collateral

$37,454, $36,868, and $33,816 for the years ended December 31, 2010, 2009, and 2008, respectively.

to secure the Failure to Pay Credit Event payment of the Trust or LLC under a credit default swap with Northwest FCS. The securities are held in the form of direct obligations of, and

The target investment rate for each customer is determined annually by the CoBank Board of Direc-

obligations fully guaranteed as to timely payment of principal and interest by, the United

tors. The target level for associations in 2010 for funds borrowed is within the range of 4-6 percent

States of America, obligations of the Federal National Mortgage Association, Federal Home

of the prior year average borrowings as specified in the Bylaws (currently 4 percent) and the target

Loan Mortgage Corporation, Federal Home Loan Bank or obligations of any agency or

level for participation loans sold is in the range of 7-13 percent of the prior ten-year average balance

instrumentality of the United States of America the obligations of which are backed by

of participations sold to CoBank as specified in the Bylaws (currently 8.0 percent).

the full faith and credit of the United States of America. Mt. Spokane 2007-A LLC is also a variable interest entity created by Lehman Brothers to acquire eligible securities, which will

The lending bank may require the holders of its equities to subscribe for such additional capital as

be used as collateral to secure the Failure to Pay Credit Event payment of the LLC under a

may be needed by the Bank to meet its capital requirements or its joint and several liability under

credit default swap with Northwest FCS. The bankruptcy of Lehman Brothers in 2008 did not

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

have an economic impact on the LLC. The securities are limited to direct obligations of, and

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

2010 ANNUAL REPORT

NOTE 5 > Premises and Equipment

Northwest FCS’ indebtedness to CoBank represents borrowings by Northwest FCS to fund its loan portfolio. Under terms of a financing agreement with CoBank, which provides Northwest

Premises and equipment consist of the following:

FCS an open-end revolving line of credit and other term structures, loans made by Northwest FCS, as well as substantially all of its assets, are assigned to CoBank as primary collateral for funds advanced by CoBank. Each debt obligation has its own term and rate structure. The weighted average interest rate for all debt was 2.08 percent at December 31, 2010. Fixed rate debt and floating rate debt typically have original maturities ranging from 1 to 30 years. Discount notes have maturities from one day to 365 days. The revolving line of credit is renewed annually and is priced at overnight funds. The maturities of debt within the direct note to the Bank are shown below:

Northwest FCS is obligated under various noncancellable operating leases. Certain office space and equipment are leased. Rental expense under these noncancellable operating leases was $6,297, $5,991, and $5,451 for the years ended December 31, 2010, 2009, and 2008, respectively. At December 31, 2010, future minimum lease payments for all noncancellable leases are as follows:

At December 31, 2010, callable debt was $658,000, with a range of call dates between January 2011 and June 2015. Under the Farm Credit Act, Northwest FCS is obligated to borrow only from CoBank, unless

NOTE 6 > Note Payable to CoBank, ACB Through the direct note to the bank, Northwest FCS is liable for the following:

CoBank gives approval to borrow elsewhere. CoBank, consistent with FCA regulations, has established limitations on Northwest FCS’ ability to borrow funds based on specified factors or formulas relating primarily to credit quality and financial condition. At December 31, 2010, Northwest FCS’ note payable is within the specified limitations. We have a secondary source of liquidity and funding through a line of credit with Bank of America. A portion of the line of credit is used to support letters of credit issued on Industrial Revenue Bonds. This portion of the line of credit is for $55,000 with $16,081 committed at December 31, 2010. The remaining portion of the line of credit is for $70,000 and is intended to provide liquidity for disaster recovery or other emergency situations. At December 31, 2010, no balances were outstanding on this portion of the line of credit.

NORTHWEST FCS

NOTE 7 > Members’ Equity

R E G U L ATO RY C A P I TA L IZ AT IO N REQ UIREMENTS AND RESTRICTIO NS The FCA’s capital adequacy regulations require Northwest FCS to achieve permanent capital of

A description of Northwest FCS’ capitalization requirements, protection mechanisms, regulatory

7.0 percent of risk-adjusted assets and off-balance sheet commitments. Failure to meet the 7.0

capitalization requirements and restrictions, and equities are provided next.

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

C AP ITA L STOCK AN D PAR TIC IPATION C ER TIF IC ATES

financial statements. Northwest FCS is prohibited from reducing permanent capital by retiring

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

stock or making certain other distributions to stockholders unless prescribed capital standards

required to invest in Northwest FCS as a condition of borrowing. Pursuant to provisions of the Farm

are met. The FCA regulations also require additional minimum standards for capital be achieved.

Credit Act, the System’s minimum initial borrower investment requirement is one thousand dollars or

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

2 percent of the related loan balance on a per customer basis, whichever is less. An initial investment,

as a percentage of risk-adjusted assets of 7.0 percent and of core surplus (generally unallocated

Class A capital stock (in the case of mortgage or agricultural loans) or participation certificates (PCs)

retained earnings) as a percentage of risk-adjusted assets of 3.5 percent. Northwest FCS’ perma-

(in the case of consumer or farm-related business loans), of the lesser of 2 percent of the loan amount

nent capital, core surplus, and total surplus ratios at December 31, 2010, were 13.19 percent, 13.03

or one thousand dollars per customer is currently required for new loans. The bylaws of Northwest

percent, and 13.03 percent, respectively. Management is not aware of any reasons why North-

FCS provide its Board of Directors with the authority to modify the capitalization requirements for

west FCS’ regulatory capital requirements would not be met in 2011.

new loans subject to a maximum of 4 percent of the related loan balance. An FCA regulation empowers it to direct a transfer of funds or equities by one or more System Each owner or joint owner of Northwest FCS at-risk Class A voting common stock is entitled to a

institutions to another System institution under specified circumstances. Northwest FCS has

single vote, while Northwest FCS Class A participation certificates and Class B participation certificates

not been called upon to initiate any such transfers and is not aware of any proposed action

convey no voting rights to their owners. Borrowers acquire ownership of capital stock or participation

under this regulation.

certificates at the time the loan is made but usually does not make a cash investment. The aggregate par value of the stock is added to the principal amount of the related loan obligation. Northwest FCS

D E S C R IP T IO N O F E Q U IT I E S

retains a first lien on common stock or participation certificates owned by its borrowers.

Northwest FCS is authorized to issue an unlimited number of shares of Class A common stock and Class A PCs with a par value of 5 dollars per share. Class B common stock and Class B PCs

Except as provided below with respect to protected capital, retirement of such equities will be at the

with a par value of 5 dollars per share are no longer being issued, although a small number of

lower of par or book value, and repayment of a loan does not automatically result in retirement of

Class B PCs are still outstanding.

the corresponding stock or participation certificates. Northwest FCS’ Board of Directors considers the current and future status of permanent capital requirements before authorizing any retirement

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

of at-risk equities. Pursuant to FCA regulations, should Northwest FCS fail to satisfy its minimum

FCS’ Board of Directors and, if retired, shall be retired at its book value, not to exceed its par value. At

permanent capital requirements, retirements of at-risk equities subsequent to such noncompliance

December 31, 2010, there were 2,534,292 shares outstanding with a total par value of $12,672.

would be prohibited, except for retirements in the event of default or loan restructuring. Class A PCs are at-risk and do not have voting rights. Class A PCs may be retired at the discreP R OT E C T ED BO R R O W E R S TO C K

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

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

exceed its par value. At December 31, 2010, there were 82,803 units outstanding with a total

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

par value of $414.

such stock at par value or stated value regardless of its book value. Protected borrower stock includes capital stock and participation certificates issued prior to October 6, 1988. If Northwest

Class B PCs are protected, have no voting rights and are retired in the ordinary course of

FCS was unable to retire protected borrower stock at par value or stated value, amounts required

business at par value. At D ecember 31, 2010, there were 253 units outstanding with a total

to retire this equity would be obtained from the Insurance Fund.

par value of $1.

2010 ANNUAL REPORT

Voting common stock is converted to nonvoting common stock two years after the owner of the stock ceases to be a borrower or immediately if the former borrower becomes ineligible to borrow from Northwest FCS. Nonvoting common stockholders are eligible to participate in

NOTE 8 > Income Taxes The provision for income taxes follows:

other services offered by Northwest FCS. Each owner or the joint owners of voting common stock is entitled to a single vote regardless of the number of shares held, while nonvoting common stock and participation certificates provide no voting rights to their owners. Voting stock may not be transferred to another person unless such person is eligible to hold such stock. Losses that result in impairment of capital stock and PCs would be allocated to such equities on a prorated basis. Upon liquidation of Northwest FCS, at-risk capital stock and participation certificates would be utilized as necessary to satisfy any remaining obligations in excess of the amounts realized on the sale or liquidation of assets. Equities protected under the Farm Credit Act would continue to be retired at par or face value. Northwest FCSâ&#x20AC;&#x2122; bylaws provide for the payment of patronage distributions. All patronage distributions to eligible stockholders shall be on a proportionate patronage basis as may be approved by Northwest FCSâ&#x20AC;&#x2122; Board of Directors, consistent with the requirements of Subchapter T of the Internal Revenue Code. For the years ending December 31, 2010, 2009, and 2008, the Board approved cash patronage distributions of $35,958, $26,031, and $31,125, respectively. Patronage distributions are recorded on the accrual basis, based on estimated amounts. The difference between the estimated accrual and the actual patronage distribution is reflected in retained earnings in the year paid. In December 2010, the Board of Directors of Northwest FCS approved a program to distribute a patronage dividend to its stockholders. The patronage dividend will be declared and accrued in 2011 and paid in 2012. All earnings not distributed as patronage allocations or appropriated for some other purpose are retained as unallocated retained earnings. At December 31, 2010, all accumulated earnings are retained as unallocated retained earnings. OT H E R COMP R EHENSIV E I N CO M E ( LO S S ) Northwest FCS reports accumulated other comprehensive income (loss) as a component of retained earnings, which is reported net of taxes as follows:

NORTHWEST FCS

The provision for income tax differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as follows:

Deferred tax assets and liabilities are comprised of the following:

Northwest FCS recorded a valuation allowance of $22,908, $19,814, and $5,451 during 2010, 2009, and 2008, respectively. Northwest FCS will continue to evaluate the realizability of the deferred tax assets and adjust the valuation allowance accordingly. The calculation of tax assets and liabilities involves management estimates and assumptions as to the future taxable earnings. The expected future tax rates are based upon enacted tax laws. Northwest FCS had no uncertain tax position to be recognized for the years ended December 31, 2010, 2009, and 2008, respectively.

NOTE 9 > Employee Benefit Plans Northwest FCS currently has a defined benefit pension plan and a defined contribution retirement plan. All employees of Northwest FCS are covered under one of the plans. Northwest FCS also has a defined benefit restoration plan, which covers certain participants in the defined benefit plan. The Northwest FCS defined benefit pension plan was closed to new participants beginning January 1, 1995. The defined benefit pension plan is noncontributory. Benefits under the defined benefit pension plan are based on salary and years of service. The following tables set forth the obligations and funded status of Northwest FCSâ&#x20AC;&#x2122; defined benefit pension plan. The funding status and the amounts recognized in the Consolidated Balance Sheet of Northwest FCS for post-retirement benefit plans follows:

The estimated net loss and prior service cost for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next year is $1,047 and $44, respectively.

2010 ANNUAL REPORT

The projected benefit obligation, accumulated benefit obligation and the fair value of plan assets for Northwest FCSâ&#x20AC;&#x2122; employee benefit plans are presented in the following table:

The funding objective of the plan is to provide present and future retirement or survivor benefits for its members by achieving an attractive rate of return, as defined by the plansâ&#x20AC;&#x2122; policy statements, without exposing the plan to undue risk. A Board of Trustees, called the Farm Credit Foundations Trust Committee, comprised of certain members of senior management of the participating employers, supervises the investment assets of the plans on behalf of the employers. The Trustees adopts an asset allocation strategy for each plan that reflects return and risk objectives, plan liabilities, and other factors.

The net periodic pension expense for defined benefit plans and other postretirement benefit plans in the Statement of Income is comprised of the following:

The Trustees employ a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. The intent of this strategy is to minimize plan expenses by outperforming plan liabilities over the long run. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and the participating entitiesâ&#x20AC;&#x2122; financial conditions. The investment portfolio contains a diversified blend of equity and fixed income investments. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks as well as growth, value, small, mid, and large capitalizations. O ther investment strategies may be employed to gain certain market exposures, reduce portfolio risk, and to further diversify portfolio assets. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies, and monthly and quarterly investment portfolio reviews.

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

The Trustees have developed an asset allocation policy based on plan objectives, characteristics of pension liabilities, capital market expectations, and asset-liability projections. The policy is long-term oriented and consistent with the risk exposure. The Trustees review the asset mixes periodically and regularly monitor the portfolios to maintain compliance with pre-established strategic allocation ranges. The current asset allocation policy of the pension plan is a target of 60 percent to 70 percent of assets in equity securities and 30 percent to 40 percent in debt securities.

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

The expected long-term rate of return assumption is determined by the Trustees who use historical return information to establish a best-estimate range for each asset class in which the plan is invested. The Trustees select the most appropriate rate from the best-estimate range, taking into consideration the duration of plan benefit liabilities and plan sponsor investment policies.

NORTHWEST FCS

The fair values of Northwest FCS’ pension plan assets at December 31, 2010 by asset category are as follows:

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

Northwest FCS is expected to contribute $2,235 to its defined benefit restoration pension plan in 2011. The liability for the postretirement life insurance plan was transferred to an insurance company in 2008 in exchange for a cash settlement paid by Northwest FCS. Employees who do not participate in the defined benefit pension plan participate in the defined contribution retirement plan, which is in accordance with Section 401 of the Internal Revenue Code. The plan requires the employer to contribute three percent of eligible employee compensation, plus an additional 3 percent of compensation in excess of the employee eligible base compensation into the plan each year. Defined contribution retirement plan expense recorded by Northwest FCS was $1,325, $1,225, and $1,238 in 2010, 2009, and 2008, respectively. All Northwest FCS employees may also participate in a salary deferral plan. For employees participating in the defined benefit plan, the salary deferral plan requires Northwest FCS to There were no significant transfers between Level 1 and Level 2 during the year.

match employee contributions up to a maximum of 100 percent of the employees’ first 2 percent of salary and 50 percent on the next 4 percent of salary. For employees participating

Plan assets are diversified into various investment types as shown in the preceding table. An investment consultant is utilized to ensure the diversification of assets. The assets are spread among numerous fund managers. Diversification is also obtained by selecting fund managers whose funds are not concentrated in individual stocks and, for the case of international funds, individual countries. 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

in the defined contribution plan, the salary deferral plan requires Northwest FCS to match employee contributions up to a maximum of 100 percent on the employees’ first 6 percent of salary. Employer contributions to the salary deferral plan were $2,399, $2,243, and $1,847 for the years ended December 31, 2010, 2009, and 2008, respectively. The senior officer compensation package, as administered by the Board Compensation Committee, includes a long-term incentive/retention program designed to retain senior management and incent them for achieving certain specified personal and corporate goals. Northwest FCS has established a Rabbi Trust for this plan and therefore accrues for the estimated liability and also records an asset for contributions to cover estimated costs.

would be classified as Level 2. In addition, assets measured at Net Asset Value (NAV ) per share and we have the ability to redeem at NAV per share at the measurement date are classified as

NOTE 10 > Related Party Transactions

Level 2. Unobservable inputs (e.g. a company’s own assumptions and data) and assets measured at NAV per share which we do not have the ability to redeem at NAV per share at the measure-

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

ment date would be classified as Level 3. All assets are evaluated at the fund level.

their immediate families, and other organizations with which such persons may be associated.

2010 ANNUAL REPORT

Senior officers and their immediate families are precluded from obtaining loans from Northwest

Assets and liabilities measured at fair value on a recurring basis at December 31, 2010 and Decem-

FCS. Such loans are subject to special approval requirements contained in FCA regulations and

ber 31, 2009, for each of the fair value hierarchy values are summarized in the following tables:

are made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated borrowers. Total loans to directors, their immediate families, and other organizations with which they are associated at December 31, 2010, amounted to $10,869. During 2010, disbursements of $16,277 were made and repayments totaled $18,913. Newly appointed directors had existing balances of $8,199 at the times of their appointment, which are included in the loans above. Departing directors had loan balances of $15,275. In the opinion of management, none of these loans outstanding at December 31, 2010, involved more than a normal risk of collectability. Northwest FCS also received $37,454, $36,868 and $33,816 of equity distributions from CoBank for the years ended December 31, 2010, 2009, and 2008, respectively. Northwest FCS owned approximately 19.6 percent of the outstanding common stock of CoBank at December 31, 2010. In the normal course of business Northwest FCS purchases loan participations from CoBank and also sells loan participations to CoBank. At December 31, 2010, Northwest FCS had sold participation interests to CoBank totaling $720,464 and had purchased loan participation interests from CoBank totaling $523,210. During 2010, Northwest FCS provided a limited recourse collection guaranty to CoBank covering four participated loans totaling $10,917 as of December 31, 2010, which had $3,669 of unfunded commitments at December 31, 2010. Pursuant to the terms of the transaction, Northwest FCS guaranteed collection of 20 percent of the outstanding balance of the loans over their respective remaining terms. At December 31, 2010, Northwest FCSâ&#x20AC;&#x2122; owned approximately 15.4 percent of Farm Credit

The tables below represent reconciliations of all Level 3 liabilities measured at fair value on a

Financial Partners, Inc. Farm Credit Financial Partners, Inc. is a dedicated service corporation that

recurring basis for the years ended December 31, 2010 and 2009.

provides business solutions for various Farm Credit associations including Northwest FCS.

NOTE 11 > Regulatory Enforcement Matters No FCA regulatory enforcement actions currently exist with respect to Northwest FCS.

NOTE 12 > Fair Value Measurements Accounting guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. See Note 2 â&#x20AC;&#x201C; Summary of Significant Accounting Policies for additional information.

NORTHWEST FCS

There were no significant transfers between Level 1 and Level 2 during the year.

LOANS For certain loans evaluated for impairment under FASB impairment guidance, the fair value

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2010, for each

is based upon the underlying collateral since the loans are collateral-dependent loans for

of the fair value hierarchy values are summarized in the following table:

which real estate is the collateral. The fair value measurement process uses appraisals and other market-based information, but in many cases it also requires significant input based on management’s knowledge of and judgment about current market conditions, specific issues relating to the collateral and other matters. As a result, these fair value measurements fall within Level 3 of the hierarchy. When the value of the real estate, less estimated costs to sell, is less than the principal balance of the loan, a specific reserve is established. OTHE R P R OPE R T Y O W NE D The process for measuring the fair value of other property owned involves the use of appraisals

VA LUATION TECH N IQUES As more fully discussed in Note 2 – Summary of Significant Accounting Policies, accounting

or other market-based information. Costs to sell represent transaction costs and are not included as a component of the asset’s fair value. As a result, these fair value measurements fall within Level 3 of the hierarchy.

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

NOTE 13 > Commitments and Contingencies

following represent a brief summary of the valuation techniques used by Northwest FCS for assets and liabilities.

Northwest FCS has various commitments outstanding and contingent liabilities.

A SSE TS HELD IN NON-QUA LIF IED TRU S TS

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

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

the financing needs of its borrowers and to manage their exposure to interest-rate risk. These

are classified within Level 1. The trust funds include investments that are actively traded and have

financial instruments include commitments to extend credit and/or commercial letters of credit.

quoted net asset values that are observable in the marketplace.

The 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

DE RI VATIVES

a borrower as long as there is not a violation of any condition established in the contract. Com-

Exchange-traded derivatives valued using quoted prices would be classified within Level 1 of the

mercial letters of credit are agreements to pay a beneficiary under conditions specified in the

valuation hierarchy. However, few classes of derivative contracts are listed on an exchange; thus, the derivative positions are valued using internally developed models that use as their basis readily observable market parameters and are classified within Level 2 of the valuation hierarchy. Such derivatives include interest rate and foreign currency cash flow hedges. The models used to determine the fair value of derivative assets and liabilities use an income statement approach based on observable market inputs, primarily the LIBOR swap curve and volatility assumptions about future interest rate movements.

letter of credit. Commitments and letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. At December 31, 2010, $2,761,700 of commitments to extend credit and $16,081 of commercial letters of credit were outstanding. Since many of these commitments are expected to expire without being drawn upon, the total commitments do not necessarily represent future cash requirements. However, these creditrelated financial instruments have off-balance-sheet credit risk because their amounts are not reflected on the balance sheet until funded. The credit risk associated with issuing commitments is substantially the same as that involved in extending loans to borrowers and management applies the same credit policies to these commitments. Upon fully funding a commitment, the

STAND BY L ET TERS OF C R ED IT

credit risk amounts are equal to the contract amounts, assuming that borrowers fail completely

Standby letters of credit are classified within Level 3. The fair value of letters of credit

to meet their obligations and the collateral or other security is of no value. The amount of col-

approximate the fees currently charged for similar agreements or the estimated cost to terminate

lateral obtained, if deemed necessary upon extension of credit, is based on management’s credit

or otherwise settle similar obligations.

evaluation of the borrower.

2010 ANNUAL REPORT

Northwest FCS also participates in standby letters of credits to satisfy the financing needs of its borrowers. These letters of credit are irrevocable agreements to guarantee payments of specified financial obligations. Standby letters of credit are recorded, at fair value, on the balance sheet of Northwest FCS. At December 31, 2010, $79,616 of standby letters of credit with a fair value of $1,441 was included in other liabilities. The standby letters of credit typically have expiration dates of one year or less. In addition, actions are pending against Northwest FCS in which claims for monetary damages are asserted. Based on current information, management and legal counsel are of the opinion that the ultimate liability, if any resulting there from, would not be material in relation to the financial position and results of operation of Northwest FCS.

A description of the methods and assumptions used to estimate the fair value of each class of Northwest FCS’ financial instruments for which it is practicable to estimate that value follows: C ASH The carrying value is a reasonable estimate of fair value. LOANS Because no active market exists for Northwest FCS’ loans, fair value is estimated by discounting the expected future cash flows using Northwest FCS’ current interest rates at which similar loans would be made or repriced to borrowers with similar credit risk. As the discount rates are based on Northwest FCS’ loan rates as well as management estimates, management has no basis to determine

NOTE 14 > Disclosures About Fair Value of Financial Instruments

whether the fair values presented would be indicative of the value negotiated in an actual sale.

Quoted market prices are generally not available for certain System financial instruments, as described below. Accordingly, fair values are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates involve uncertainties and matters of judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

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

The next table presents the carrying amounts and estimated fair values of Northwest FCS’ financial instruments at December 31, 2010, 2009, and 2008.

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 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. A L LO WA N C E F O R LOA N LOS S E S 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. ASSE TS H E LD I N NON-QUA L IF IED B EN EF ITS T RUS TS These assets relate to deferred compensation and supplemental retirement plans. As discussed in Note 12, the fair value of these assets is quoted net asset values. N OT E PAYA B L E TO CO BA N K , AC B Notes payable are not all regularly traded in the secondary market and those that are traded may not have readily available quoted market prices. Therefore, the fair value of the majority of instruments is estimated by calculating the discounted value of the expected future cash flows. To the extent that quoted market prices on like instruments are available, the fair value of these instruments is estimated by discounting expected future cash flows based on the quoted

NORTHWEST FCS

market price of similar maturity U.S. Treasury notes, assuming a constant estimated yield spread

exchange forward sale as it arises. Such hedges are accounted for as a cash-flow hedge.

relationship between Systemwide bonds and notes and comparable U.S. Treasury notes. Northwest FCS records derivatives as assets or liabilities at their fair value on the consolidated DE RI VATIVE ASSETS AND LIA BILITIES

balance sheet. Northwest FCS records changes in the fair value of a derivative in current period

The fair value of derivative financial instruments is the estimated amount that Northwest FCS

earnings or accumulated other comprehensive income/(loss), depending on the use of the

would receive or pay to replace the instruments at the reporting date. The values are provided

derivative and whether it qualifies for hedge accounting. For cash-flow hedge transactions,

by the Bank based on internal market valuation models.

in which Northwest FCS hedges the variability of future cash flows related to a variable-rate asset or liability, changes in the fair value of the derivative are reported in accumulated other

STAND -BY L ET TERS OF C R ED IT

comprehensive income/(loss). The gains and losses on the derivatives that Northwest FCS

The fair value of stand-by letters of credit is based on fees currently charged for similar agreements.

reports in accumulated other comprehensive income/(loss) will be reclassified as earnings in the periods in which earnings are affected by the variability of the cash flows of the hedged

NOTE 15 > Derivative Instruments and Hedging Activities

item. The ineffective portion of all hedges is recorded in current period earnings. Northwest FCS’ current hedging activities consist of cash-flow hedges with no ineffectiveness.

Northwest FCS maintains an overall risk management strategy that incorporates the use of derivative financial instruments to minimize significant unplanned fluctuations in earnings

By using derivative instruments, Northwest FCS exposes itself to credit risk and market

that are caused by interest rate volatility. Our goal is to manage interest rate sensitivity

risk. Generally, when the fair value of a derivative contract is positive, this indicates that the

by modifying the repricing or maturity characteristics of certain balance sheet assets and

counterparty owes the Association, thus creating a performance risk for the Northwest FCS.

liabilities. Northwest FCS also maintains a foreign exchange risk management strategy to

When the fair value of the derivative contract is negative, Northwest FCS owes the counterparty

reduce the impact of foreign currency fluctuations on our foreign currency denominated loan

and, therefore assumes no performance risk. Northwest FCS’ derivative activities are monitored

assets. As a result of interest rate and foreign exchange rate fluctuations, fixed-rate assets

by its Asset-Liability Management Committee (ALCO) as part of the Committee’s oversight of the

and liabilities will appreciate or depreciate in market value. The effect of such unrealized

Association’s asset/liability and treasury functions. The Committee is responsible for approving

appreciation or depreciation is expected to be substantially offset by gains and losses on the

hedging strategies that are developed within parameters established by Northwest FCS’ board

derivative instruments that are linked to these assets and liabilities. Interest rate and foreign

of directors. The resulting hedging strategies are then incorporated into the Association’s overall

exchange fluctuations also cause interest income and interest expense of variable-rate assets

risk-management strategies.

and liabilities to increase or decrease. 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

During the third quarter of 2010, Northwest FCS executed an interest rate cap contract with

assets and liabilities. The association considers the strategic use of derivatives to be a prudent

CoBank having a notional amount of $73 million. At the trade date, Northwest FCS paid

method of managing interest rate and foreign exchange risk, as it prevents earnings from

CoBank $1,500 which was the trade-date fair value. The fair value of the cap at December

being exposed to undue risk posed by changes in interest rates or foreign exchange rates.

31, 2010 is $1,996. The corresponding gain of $496 was recorded to accumulated other comprehensive loss.

During the third quarter of 2010, Northwest FCS purchased an interest rate cap to hedge the potential impact of rising interest rates on our floating-rate debt. If the strike rate of

As of December 31, 2010, Northwest FCS recorded a derivative liability of $313 for its executed

the purchased interest rate cap is exceeded, Northwest FCS will receive cash flows on the

foreign currency forward contracts, with the corresponding offset to accumulated other

derivative to hedge our floating-rate funding exposure above such strike levels. The interest

comprehensive loss adjusted in accordance with accounting guidance on foreign currency

rate cap is accounted for as a cash-flow hedge.

translation. The fair value at December 31, 2009, was a derivative liability of $176 with a corresponding offset to accumulated other comprehensive loss adjusted in accordance with

Northwest FCS also uses foreign exchange forward positions to “lock in” a desired cash flow on

accounting guidance on foreign currency translation. The fair value at December 31, 2008, was

a foreign denominated loan. The specific terms and amounts of the forwards are determined

a derivative liability of $253 with a corresponding offset to accumulated other comprehensive

based on the known cash flows on the loans. Each cash flow is hedged via a separate foreign

loss adjusted in accordance with accounting guidance on foreign currency translation.

2010 ANNUAL REPORT

NOTE 16 > Quarterly Financial Information (Unaudited)

Net income was lower in the first quarter of 2009, when compared to the remaining three quarters, due to lower levels of net interest income, a significant provision for loan losses,

Quarterly results of operations for the years ended December 31, 2010, 2009, and 2008 follow:

a higher than normal income tax expense and a lower level of miscellaneous income. Net income was lower in the second quarter of 2009, when compared to the remaining two quarters, due to lower levels of net interest income, another significant provision for loan losses, and lower levels of income attributable to financially related services. A decrease in income tax expense partially offset the negative impact of the above items. Net income was lower in the third quarter, when compared to the fourth quarter, due to a somewhat lesser provision for loan losses, which was partially offset by a reduction in income tax expense. Net income for the fourth quarter, while significantly higher than previous quarters, was negatively impacted by a provision for loan losses, an increase in salary and benefit expenses primarily due to various year-end bonus programs and higher miscellaneous expense. These amounts were partially offset by higher income attributable to financially related services income and an income tax benefit. Net income was lower in the first quarter of 2008 due to lower levels of net interest income, a provision for loan losses, and higher than normal income tax expense. Net income in the third quarter was higher than previous quarters primarily due to increased levels of net interest income, in large part attributable to higher loan volume. A larger than normal provision for loan losses in the third quarter negatively impacted the higher net income. Net income for the fourth quarter was lower than previous quarters due in large part to a significant provision for loan losses resulting from credit deterioration in the ethanol, nursery/greenhouse, and protein segments of the portfolio. Net interest income decreased slightly from the third quarter but was more than offset by increases in patronage dividend income and financially

Net income during the first quarter of 2010 was higher as compared to the second and fourth quarters largely as a result of an excess refund paid to Northwest FCS by the Farm Credit System Insurance Corporation relating to the Farm Credit Insurance Fund. This one-time item was partially offset by a higher-than-average provision for credit losses. During the second quarter, net interest income after provision for credit losses increased as net interest income

related services. Increases in salaries, purchased services, furniture and equipment, Farm Credit System Insurance Corporation premiums, miscellaneous expense and income tax expense negatively impacted fourth quarter income. Northwest FCSâ&#x20AC;&#x2122; 2010 Quarterly Reports to Stockholders are available free of charge on request by contacting Northwest Farm Credit Services, ACA, P.O. Box 2515, Spokane Washington

increased from the first quarter, and the provision for credit losses trended down toward the

99220-2515 or telephone (509) 340-5300. Northwest FCSâ&#x20AC;&#x2122; 2010 Quarterly Reports to

quarterly average for the year. The third quarter was the strongest earnings quarter for the

Stockholders are also available free of charge at any office location or on the internet at

year, after adjusting first quarter earnings for the one-time refund. Third quarter earnings

www.farm-credit.com. The 2011 Quarterly Reports to Stockholders will be available on

were boosted by continuing strong trends in net interest income, and lower-than-average

approximately May 10, 2011, August 10, 2011, and November 10, 2011.

provision for credit losses. Net income for the fourth quarter was lower when compared to the previous three quarters. A continued increase in net interest income and strong

NOTE 17 > Subsequent Event

financially related services income were more than offset by a higher-than-average provision for credit losses, increased compensation expenses attributable to year-end bonus programs,

Northwest FCS has evaluated subsequent events through March 7, 2011, which is the date the

and higher public relations and other expenses.

financial statements were issued or available to be issued.

NORTHWEST FCS

N OR TH W ES T

FARM

CR E D I T

SE R V I CE S,

AC A

B OA R D O F D I R E C TO R S Corporate Governance

DISCLOSURE INFORMATION REQUIRED BY FARM CREDIT ADMINISTRATION REGULATIONS (UNAUDITED)

The Board of Directors at Northwest FCS is comprised of 14 director positions. Eleven directors are elected by the voting membership. Each represents one of eleven geographic regions that comprise Northwest FCS’ operating territory. Three directors are appointed by the other members of the Board. Two of these appointed directors are Outside Directors who cannot be customers, stockholders, employees or agents of any Farm Credit Institution. One of these Outside Directors is designated as a “financial expert” as defined by FCA Regulation. This director brings not only

DE SCRIPTION OF B USINES S General information regarding the business is incorporated herein by reference to Note 1 of the financial statements included in this annual report. The description of significant developments, if any, is incorporated herein by reference to

independence but also financial, accounting, and audit expertise to the Board and chairs the Board’s Audit Committee. The other Outside Director position is used to bring independence, an outside perspective and other areas of expertise to enhance Board oversight capabilities. Currently, both Outside Directors qualify as financial experts and one acts as an alternate to the designated “financial expert.” The third appointed director position is a stockholder and

“Management’s Discussion and Analysis” of Financial Condition and Results of Operations

is intended to help assure representation of market segments not currently represented by a

included in this annual report.

stockholder elected director position or to bring specific skills or background to the Board.

DE SCRIPTION OF PR OPER T Y Northwest Farm Credit Services, ACA together with its wholly-owned subsidiaries (Northwest FCS) is headquartered in Spokane, Washington. Northwest FCS owns and leases various facilities across the territory it serves, which are described in this annual report.

In addition to a board structure intended to provide for specialized expertise on the Board, Northwest FCS’ Board has in place a comprehensive director training and development plan. This training consists of an annual board self-assessment of its governance practices as well as several modules of core curriculum offered as part of a new director orientation program. This program is intended to develop an understanding of the roles and responsibilities of a director as well as

L E G AL P R OCEED INGS

to familiarize newer Board members with key areas of financial performance and reporting. This

Information regarding legal proceedings is incorporated herein by reference to Note 13 of the

training commitment also involves an expectation of attendance by all directors at both Farm

financial statements included in this annual report.

Credit System and non-system meetings, seminars, and conferences. This balance of training assures not only an understanding of the Farm Credit System, but also exposes Board members

DESCRIPTION OF C APITA L S T RU C T U R E

to “Best Practices” of other financial and lending institutions and allows them to benchmark

Information regarding capital structure is incorporated herein by reference to Note 7 of the finan-

Northwest FCS’ operations against those of other successful lenders.

cial statements included in this annual report. The Board is independent of management. The CEO and VP- Internal Audit report to the Board DE SCRIPTION OF L IABILITIES Information regarding liabilities is incorporated herein by reference to Notes 5, 6, 8, 9, 13, and 15 of the financial statements included in this annual report. SELECTED FINANCIAL D ATA “Five-Year Summary of Selected Financial Data” included in this annual report, is incorporated herein by reference.

and no management or employees may serve as directors. The Board generally has seven regularly scheduled meetings each year, plus conference calls as needed between meetings, and has established a number of committees to provide concentrated focus and expertise in particular areas and to enhance the overall efficiency of scheduled Board meetings. All policies and substantial contracts or new programs are generally reviewed by one of these committees, with any actions recommended to the full Board for approval. Each committee created by the Board prepares an Operating Statement outlining the purpose of the committee, its duties,

M A NAGEMENT ’S DISCUS SIO N A ND A NA LYSIS

responsibilities, and authorities. Generally, these responsibilities are advisory in nature, with the

“Management’s Discussion and Analysis” included in this annual report, is incorporated herein

full Board acting on committee recommendations. These Operating Statements are reviewed

by reference.

and approved by the full Board at least annually. This committee structure is organized to reflect

2010 ANNUAL REPORT

Northwest FCS’ key financial and operational areas of risk and to enhance the overall effectiveness

and all public financial disclosures, meet privately with internal and external auditors, and

of the Board’s oversight of these areas. This committee structure consists of a Governance, Audit,

review any complaints regarding accounting irregularities and fraud. The Operating Statement

Compensation, Risk, Strategic Opportunities, and Reputation Committee. The following are full

is posted on Northwest FCS’ website at www.farm-credit.com.

descriptions of those committees: Compensation Committee Governance Committee

This committee consists of the Board Chair and Vice Chair, at least one Outside Director, and

This committee is made up of the Chair and Vice Chair of the Board as well as the Chair of each of

three to four other Board members selected by the Board Chair and the Outside Director.

the other standing committees: Compensation, Reputation, Audit, Risk, and Strategic Opportuni-

Neither the CEO nor any management can have any involvement in the selection of committee

ties. The Governance Committee has the authority to review, prioritize, and recommend agenda

members nor can they participate in any deliberations of the committee on matters relating to

items for Board meetings and is responsible for all Board policies not assigned to other com-

their own compensation.

mittees. Committee duties also include serving as an Ad Hoc Committee on major System and organizational issues. This committee also oversees the Board election process, director training,

The committee is responsible for reviewing and recommending for full Board approval the

Standards of Conduct, and serves as a Search Committee for appointed director positions and in

performance standards of the CEO and the evaluation of the CEO’s performance against those

the event of the CEO’s transition.

standards. It also recommends to the Board all actions necessary to administer the CEO’s base salary, short-term bonus, and long-term deferred compensation awards under the terms of

Audit Committee

the CEO’s compensation plan. This committee is also responsible for recommending to the

This committee is made up of at least four Board members, including at least one appointed

Board the terms of the senior officers’ compensation plan and participation of senior officers

Outside Director. All members of the committee are expected to have practical knowledge of

in that plan. The Board has delegated to the CEO the responsibility to administer the base

finance and accounting, be able to read and have a working understanding of the financial

salaries of those senior officers within Board approved guidelines. However, the CEO must

statements, or develop that understanding within a reasonable period of time after being

review the base salary administration with the Compensation Committee, and the committee

appointed to the committee. The director designated as the “financial expert” serves on this

recommends for Board approval any short- or long-term bonus to be paid to senior officers

committee and acts as the chair. Outside Director Christy Burmeister-Smith currently serves

under the terms of their compensation plan. The committee is also responsible for director

in this position. The Board of Directors has determined that Ms. Burmeister-Smith has the

compensation and for oversight of Northwest FCS’ employees’ salary and benefit plans and

qualifications and experience necessary to serve as an audit committee “financial expert,” as

all Board policies applicable to those plans and other human resource matters not specifically

defined by FCA regulation, and she has been designated as such. Outside Director Julie Shiflett

assigned to other committees.

also qualifies as a financial expert and is a designated “alternate” to serve in Ms. BurmeisterSmith’s absence.

Risk Committee This committee provides oversight of all key risk areas relating to credit, finance and information

The Audit Committee members are appointed by the Board. All members of the Audit

technology operations. This committee reviews credit portfolio policies and management

Committee are independent of management of Northwest FCS. The Audit Committee has

reports that monitor compliance with these policies. It also acts on behalf of the Board on

unrestricted access to representatives of the Internal Audit Department, independent public

certain delegated credit related matters. The committee reviews and recommends to the full

accountants, and financial management. Internal Audit reports directly to this committee.

Board for approval underwriting standards and portfolio and lending limit policies, which guide all of Northwest FCS’ lending and credit related activities. In addition to monitoring the overall

This committee assists the Board in fulfilling its oversight responsibility related to accounting

credit characteristics of the industries we serve and our existing portfolio, the committee also

policies, internal controls, financial reporting practices, and regulatory requirements. This

reviews and recommends to the full Board for approval, certain credit related actions that exceed

committee has an Operating Statement detailing its purpose and key objectives, authority,

management’s delegated authority. This committee also oversees key risk areas associated with

composition, meeting requirements, and responsibilities. The Operating Statement, among

budget, operating expenses, funding, interest rate, liquidity, capital management, development

other things, gives the committee the authority to hire and compensate the external auditor,

and implementation of IT systems necessary for Northwest FCS’ operations, as well as those risks

approve all audit and permitted non-audit services, review the audited financial statements

associated with its alliance partners and counterparties.

NORTHWEST FCS

Strategic Opportunities Committee

Brad Foster – Holladay, Utah

This committee assists the Board in developing and monitoring the association’s marketing,

Mr. Foster resigned from the board in February 2010 to pursue a personal opportunity. Shawn

servicing, and business management strategies in accordance with Northwest FCS’ mission, policies

Walters was appointed by the board to serve out Mr. Foster’s term. Mr. Foster operates a cow-

and procedures. It is responsible for overall business and strategic planning and for exploring and

calf operation, seed potatoes, hay, barley, and wheat farm.

evaluating future business and strategic initiatives. The committee oversees the Local Advisors Program, as well as the management, location and construction of branch facilities to assure they

Mark Gehring – Salem, Oregon

meet our operational and customer needs. The committee also reviews market and other research

Mr. Gehring was elected in 2010 and his term expires 2015. He raises Marionberries,

findings and makes recommendations to the full Board consistent with those findings.

blackberries and turf grasses for seed. He is the Chair of the Board of RS Growers, Inc. and RainSweet, Inc., a Salem, Oregon, fruit and vegetable processor.

Reputation Committee This Committee is responsible for matters impacting Northwest FCS’ image and reputation. This

David Hedlin – Mt. Vernon, Washington

includes most marketing, legislative, community/corporate involvement activities and the Rural

Mr. Hedlin was re-elected in 2011 and his term expires 2016. He raises vegetable seed, fresh

Grant Program. This committee acts as a resource on matters primarily legislative and regulatory

market vegetables, pickling cucumbers, pumpkins, and wheat. Mr. Hedlin serves on the boards

in nature, including monitoring Northwest FCS’ lobby activities, developing recommended

of Northwest Ag Research Foundation, Skagitonians to Preserve Farmland, Skagit Valley Culinary

positions and legislative priorities and reviewing requests for support for various legislative or

Arts, Skagit County Farmland Legacy and is Commissioner of Skagit County Dike District #9.

regulatory initiatives. Luther Horsley – Midland, Oregon Mr. Horsley’s term expired in February 2010 and because of term limits he could not seek re-election. The following presents certain information regarding the directors of Northwest FCS. It includes their

Rick Barnes was elected by the stockholders to replace Mr. Horsley. Mr. Horsley raises feed barley, wheat,

business experience and any business in which they serve on the board of directors or as a senior officer.

mint, and alfalfa hay and has a cow-calf operation. Mr. Horsley is President of the Klamath Drainage District Board of Supervisors and President of the Klamath Water Users Association.

Rick Barnes – Callahan, California Mr. Barnes was elected in 2010 and his term expires 2015. He operates a cow-calf operation

Herb Karst – Sunburst, Montana

with some timber and produces grass hay for the horse market. He is a director of Siskiyou

Mr. Karst was elected in 2008 and his term expires 2013. He is President and Manager of Karag, Inc.,

Resource Conservation District.

a family-held corporation that produces wheat, barley, canola, and hay on a 4,300 acre farm. Mr. Karst is a member of the Montana Grain Growers Association (past president and board member).

Christy Burmeister Smith – Newman Lake, Washington Ms. Burmeister-Smith was appointed as an Outside Director in 2010 and her term expires 2015. She

Art Lee – New Plymouth, Idaho

is Vice President-Controller & Principal Accounting Officer at Avista Corp. in Spokane, Washington.

Mr. Lee’s term expired in February 2010 and because of term limits could not seek re-election. Jim Farmer was elected by the stockholders to replace Mr. Lee. Mr. Lee operates a dairy and

Drew Eggers – Meridian, Idaho

raises beef, sugar beets, peppermint, corn, alfalfa, grain, pasture, and asparagus. Mr. Lee is a

Mr. Eggers was re-elected in 2009 and his term expires 2014. He raises peppermint, spearmint,

director of the United Dairymen of Idaho and serves on the University of Idaho Advisory

sugar beets, winter wheat, and corn. Mr. Eggers is Chairman of Leadership Idaho Agriculture

Board for Animal and Veterinary Science. He also serves on the State Board of Idaho Dairy Herd

Foundation and past president of Food Producers of Idaho.

Improvement Association.

Jim Farmer – Nyssa, Oregon

Ed Malesich – Dillon, Montana

Mr. Farmer was elected in 2010 and his term expires 2015. He operates an irrigated row crop

Mr. Malesich was reelected in 2007 and his term expires 2012. He operates a commercial cow-calf

farm and produces onions, wheat, field corn, and dry edible beans for seed. He is the Secretary/

operation and raises wheat, malt barley, and alfalfa hay. Mr. Malesich is Vice Chairman of Rocky

Treasurer of Nyssa Rural Fire Protection District.

Mountain Supply, a Southwest Montana supply cooperative.

2010 ANNUAL REPORT

B ruce Nelson – Spok ane, Washington

Shawn Walters – Newdale, Idaho

Mr. Nelson was re-elected in 2009 and his term expires 2014. He raises several varieties of wheat,

Mr. Walters was appointed to the board in 2010 to serve out the remaining term of Mr. Brad

peas, lentils, and nursery trees. Mr. Nelson is past president of the Washington Wheat Growers

Foster. Mr. Walter’s was elected in 2011 and his term expires in 2016. He operates a family farm

Association. He serves on the Farm Credit Council (FCC) Board of Directors and served as Chair

and fresh pack potato facility, grows wheat, barley, alfalfa and 10 to 15 varieties of potatoes.

in 2007 and 2008. FCC is a Farm Credit System trade association that handles primarily legislative

Shawn serves on the Idaho Potato Commission and as a Director of the Enterprise Canal.

and regulatory matters. D on W ir th – Tangent, O regon D ave Nisbet – B ay Center, Washington

Mr. Wirth’s term expired in February 2010 and he did not seek re-election. The stockholders elected

Mr. Nisbet is a board appointed stockholder director. He was appointed by the board in March

Mark Gehring to fill this position. Mr. Wirth is a minority owner of Cala Farms, Inc., a turf and forage

2007. His term expires 2012. He grows Pacific oysters and owns a shellfish processing plant.

seed farm with a few cattle managed by the next generation, minority owner and Director of

Mr. Nisbet is a director of the Pacific Shellfish Institute, Advisory Board Member, Oregon State

Operations of Saddle Butte Ag, Inc., a wholesale retail seed company handling turf and forage

University Coastal Oregon Marine Experiment Station-COMES, Executive Board Member OSU Seafood Consumer Center, and member of the Pacific Coast Shellfish Growers Association. K evin R iel – Yak ima, Washington Mr. Riel was elected in 2007 and his term expires 2012. He raises hops, apples, hay, and Concord grapes. Mr. Riel is a member of Knights of Columbus, fourth degree, was awarded KnighthoodInternational Order of the Hop and is a member of National Grape Co-Op, Tree Top Co-Op and Farm Bureau. He is past Chair of the Washington State Hop Commission and past president of the U.S. Hop Research Council. K aren S chott – B roadview, M ontana Ms. Schott was re-elected in 2011 and her term expires 2016. She raises winter wheat, spring wheat, and peas. She also manages a lease pasture operation. Ms. Schott serves as Secretary of the family farming operation, Bar Four F Ranch, Inc. She is also a member of the advisory committee to the Montana Southern Ag Research Station and a member of the planning committee for the Broadview Community Center Board.

seeds, and minority owner and CEO of Tan Ag, Inc. He is Secretary of the Shedd Community LLC, Chair of the Central Linn Education Foundation, and a member of Corvallis Morning Rotary. CO M P E N S AT IO N O F D IR E C T O R S Director compensation is under the oversight of the Board’s Compensation Committee. The committee conducts periodic director compensation studies to identify current compensation paid to directors of Farm Credit and other similar entities. Based upon these studies, the compensation committee recommends for approval adjustments to director compensation including the chairman or other key board positions. Absent such a study, board policy limits any adjustment to director compensation to the cost of living index published each year by the Farm Credit Administration, the Farm Credit System’s federal regulator. Increases to director compensation typically become effective May 1 of each year. Director compensation in 2010 was set at a rate of $46,560 per year for directors. The Board Chair and Chair of the Audit Committee are paid $51,240. This represents an additional 10 percent, which reflects their unique responsibilities and significant additional time demands of these two

Julie Shifl ett – Spok ane, Washington

positions. Director compensation paid annually to all directors was increased effective May 2010

Ms. Shiflett is an Outside Director appointed by the Board. She was appointed in 2008, and her

by $1,560 ($1,740 in the case of the Chair of the Board and the Chair of the Audit Committee).

term expires in 2013. She has been designated as the alternate to the designated “Financial

Each director receives a monthly retainer of $3,880 and the Board Chair and Chair of the Audit

Expert” on Northwest FCS’ Board. She is the Vice President of Finance for Red Lion Hotels and

Committee receive a monthly retainer of $4,270. No additional per diem is paid for attendance at

founding partner of Northwest CFO which assists emerging and mid-market companies to

Northwest FCS meetings or functions. If a director is not able to attend a regular monthly board

increase cash flow, profitability, sales, and company value.

meeting, then the director only receives the monthly retainer if attendance at or performance of other official business during that month warrant that payment.

M arlis Petersen Spawn – S pok ane, Washington Ms. Petersen Spawn’s term expired in February 2010 and she chose not to seek re-appointment.

Directors are reimbursed for travel expenses and related expenses while conducting association

Christy Burmeister-Smith was appointed to replace Ms. Petersen Spawn effective March 2010.

business. The aggregate amount of expenses reimbursed to directors in 2010 was $326,611

Ms. Petersen Spawn was an Outside Director appointed by the board. She is a Certified Public

compared to $309,960 in 2009 and $351,235 in 2008. The Board compensation policy is available

Accountant and Director of Finance and Accounting at Spokane Teacher’s Credit Union.

and will be disclosed to stockholders upon request.

NORTHWEST FCS

Information for each director for the year ended December 31, 2010, is provided in the following table:

Wm. Fred D ePell, Executive V ice President-Financial S er vices Mr. DePell has served as Executive Vice President – Financial Services since 1992. Prior to that, he held various positions for Northwest FCS. Joan E. Haynes, Executive V ice President-Corporate Administration Ms. Haynes has served as Executive Vice President – Corporate Administration since 1994. Prior to that, she held various positions for Northwest FCS. Tom Tracy, Executive V ice President and G eneral Counsel Mr. Tracy has served as Executive Vice President and General Counsel since 1989. Mr. Tracy serves on the Board of Governors of the Farm Credit System Captive Insurance Company. This company offers, administers, and provides access to a broad range of insurance products to Farm Credit entities on a captive basis. He also serves on the Plan Sponsor Committee of the Farm Credit Foundations Consolidated Benefit Plan. This committee oversees the plan design and non-fiduciary responsibilities associated with the benefit plans offered by a number of Farm Credit employers. Dan Stainbrook , Executive V ice President-Credit Mr. Stainbrook has served as Executive Vice President – Credit since 1992. Prior to that, he was vice president-operations for Northwest FCS. Before coming to Northwest FCS, Mr. Stainbrook held various positions within the Louisville Farm Credit District. Tom Nak ano, Executive V ice President-Chief Financial O fficer and Chief Information O fficer Mr. Nakano has served as Executive Vice President-Chief Financial Officer since October 2004 and Chief Information Officer since February 2007. Prior to that he was Vice President-Loan

SENIO R O FFICERS Listed next are the CEO and six initial senior officers of Northwest FCS who served throughout 2010. These senior officers have been in their respective positions for a number of years, report to the CEO and are on the Executive Committee of Northwest FCS. Mr. Phil DiPofi is listed as well. Mr. DiPofi was hired effective December 1, 2010 in the position of Chief Operating Officer and President and CEO-elect. Information is provided on the experience of these senior officers, as well as on any business for which they serve on the board of directors or act as a senior officer and the primary business that organization is engaged in.

Accounting and Operations and held various positions for Northwest FCS. Mr. Nakano serves on the Farm Credit Foundations Consolidated Benefit Trust Committee. This committee oversees the fiduciary and plan administrative responsibilities of the medical and welfare benefit plans offered by a number of participating Farm Credit employers. K athy Payne, Executive V ice President-Human Resources and M ark eting Ms. Payne has served as Executive Vice President – Human Resources and Marketing since 2003 and in a lead position in the Human Resources department since 1992.

Jay B. Penick , President and Chief Executive O fficer

Phil D iPofi, Chief O perating O fficer and President and CEO -Elect.

Mr. Penick served as President and CEO since September 1989. Prior to that, he held various positions

Mr. DiPofi served in various senior officer positions with CoBank since 2001, most recently in the

within the Louisville Farm Credit District. Mr. Penick serves on the boards of directors of both Financial

position of Chief Banking Officer. Prior to that, Mr. DiPofi worked in various senior positions in the

Partners, Inc. (FPI) and Farm Credit Council Services (FCCS). FPI is a technology firm providing

commercial banking industry. Mr. DiPofi currently serves on the Board of FPI.

technology support for a number of Farm Credit institutions, including Northwest FCS. FCCS is a Farm Credit System owned entity providing fee based services such as audit, human resources, training

Six additional senior officers were added to the Executive Committee during 2008. Information

and development. Mr. Penick retired as President and CEO effective December 31, 2010.

on the experience and business relationships of these senior officers is set out next. Because

2010 ANNUAL REPORT

these senior officers continued to report to the initial senior officers previously identified throughout 2010 and have not yet been integrated into the executive compensation plans discussed in the following section, their compensation is disclosed separately. Jim A llen, S enior V ice President-Capital M ark ets Mr. Allen has led Capital Markets at Northwest FCS since its inception in 1995. Prior to that, he held various positions for Northwest FCS since being hired in 1978. B rent Fetsch, S enior V ice President-Community Lending Mr. Fetsch has led Community Lending since 2005. Prior to that he held various positions for Northwest FCS including Regional Vice President and Vice President – Customer Service. Mr. Fetsch has worked for Northwest FCS since 1987. Jeff Hattori, S enior V ice President-A gribusiness Mr. Hattori has served as a leader in Agribusiness since 2004. Before coming to Northwest FCS in 1991, he held various positions with a regional commercial bank. John Phelan, S enior V ice President-Commercial Lending Mr. Phelan has led Commercial Lending since 2005. Prior to that, he held various positions with Northwest FCS since being hired in 1992. Wendy V ail, S enior V ice President-Loan Processing Ms. Vail has served as a leader in Loan Processing since 2002. Prior to that, she led a headquarters loan accounting team with Northwest FCS when she was hired in 2000. Prior to joining Northwest FCS, Ms. Vail worked as a Certified Public Accountant for a large public accounting firm. M arnie V andenberg, S enior V ice President-A gribusiness Ms. Vandenberg has served as a leader in Agribusiness since 2001. Prior to that she held various positions for Northwest FCS since she was hired in 1990.

CO M P E N S AT IO N O F C E O A N D S E N IO R O F F IC E R S

achieving predetermined financial and operational goals approved by the Board each year. The long-term deferred portion is also designed to retain these key executives. Under his current plan, the CEO forfeits any unpaid long-term awards if he resigns his position prior to December 31, 2010. In the case of the initial senior officers, the plans have provided that they forfeit any unpaid long-term award if they resign prior to three years following the year in which the longterm award was made. However, to manage risk associated with significant senior officer turnover in any one year, three of these initial senior officers’ plans were amended to provide that they would forfeit any unpaid long-term award if they left prior to December 31, 2010. In the case of those three senior officers, their plans terminated at the end of 2010 and all long-term awards from prior years, along with any award for 2010, will vest and be paid out in January 2011. Should these three senior officers elect to remain with Northwest FCS beyond 2010, new compensation plans will be entered into. The amounts used to fund any long-term awards of the CEO and any long-term award to senior officers once earned are invested and held in trust. These funds are subject to market value fluctuations while held in trust and until actually paid out to participating senior officers. The participants bear the full risk of this market performance. The funds, until paid, are also subject to the claims of creditors of Northwest FCS in the event of liquidation. The six more recently appointed senior officers who served on the Executive Committee throughout 2010 have their compensation plans administered under programs in place for other members of Northwest FCS’ management team. The specifics of these plans vary by participant depending on the nature of their duties and responsibilities. However, in all cases, these plans provide for administration of base salaries in accordance with Northwest FCS’ established salary structure and provide the potential for participants to earn short-term bonus/incentive payments each year based upon their accomplishment of predetermined organizational and personal performance goals. These more recently appointed senior officers do not participate in the long-term deferred plan of the initial senior officers but do participate in a retention plan applicable to a number of key employees. This retention plan is not funded or held in trust but contractually obligates Northwest FCS to make future payments in specified amounts. The amounts vary by participant. These payments are paid to participants approximately two and a half years following their award. Participants forfeit those amounts if they resign prior to being paid. The total base salary, short-term/incentives, and retention payments paid to these six more recently appointed senior officers are also set out later in this report.

Executive Compensation - Summary The Board’s Compensation Committee is responsible for the oversight of executive compensation, including that of the CEO and senior officers. The CEO and initial senior officers described previously have been under executive compensation plans since 1995. These compensation plans provide for the administration of these senior officers’ base salary based upon competitive industry survey data and provide opportunities for them to earn both shortterm bonus and long-term deferred compensation awards. Short-term bonus and long-term deferred awards are based upon both the organization’s performance and these participants

NORTHWEST FCS

CEO Compensation The CEO’s base salary is benchmarked against that paid to CEOs of other financial institutions that are smaller than Northwest FCS (approximately 85 percent of Northwest FCS’ asset size). In addition, the CEO can earn both a short-term bonus and long-term deferred compensation award each year based on pre-established performance goals. The CEO’s short-term bonus potential in 2010 was a maximum of 60 percent with a target of 40 percent of his base salary. The CEO’s maximum long-term award each year is up to a 20 percent interest in the long-term

deferred compensation trust described in the 2004 Plan later in this report. The short-term bonus shown in the next table reflects that earned in each year. The deferred amounts shown in the table reflect the long-term award earned by the CEO together with any gains or losses incurred on funds held in Trust in each of the years identified. The CEO’s compensation plan was effective January 1, 2004 (2004 Plan). The 2004 Plan was frontfunded at two times the CEO’s 2003 base salary. This plan initially ran through December 31, 2008. However, in 2006 the 2004 Plan was amended to extend it to December 31, 2010. Under this amended 2004 Plan, the CEO can earn a long-term deferred award of up to a maximum of a 20 percent interest in the unawarded trust fund balance created to administer this plan. Under this plan, should the CEO resign prior to December 31, 2010, he forfeits all unpaid long-term deferred awards made under this amended 2004 Plan. When the plan was extended from 2008 to 2010, it was necessary to place additional funding into trust in order to provide for potential long-term awards in years 2009 and 2010. These two years were funded at a proportionate level based on the CEO’s 2005 base salary. In addition, this amended 2004 Plan provided for the potential payout of a portion of awarded amounts each year beginning in January 2007. The Board, in its sole discretion, will review and approve any such payout each year. However, no funds may be paid out that do not represent prior years’ earned awards (with any gains/losses) and, to assure CEO retention, in no event can the remaining trust balance drop below specified levels set by the Board following each year’s payment. The amounts paid out each year under this amended 2004 Plan are also described later. This 2004 Plan will terminate at the end of 2010 and all amounts awarded for 2010 and prior years that remain unpaid and held in Trust will be paid to the CEO in early 2011.

*Deferred awards represent the principal amount of the long-term award earned in each of the three years shown along with gains/losses incurred on the funds held in trust that year. **The CEO is provided a leased vehicle for his business and personal use. The income related to personal use of this vehicle, as determined by Internal Revenue Service regulations, is included in the CEO’s total compensation. This item would also include any cash or non-cash compensation or awards paid to the CEO or these senior officers. In years where the total volume of these perquisites is less than $5,000, no reporting is required. In the case of the CEO only, this figure represents the value of that personal use of a vehicle as well as a retention payment made to the CEO to support a transition to a new CEO and assure his support of that

Senior O fficer Compensation The compensation plan for the initial senior officers described previously provides for base salaries to be administered consistent with competitive financial industry survey data of their position with comparable financial institutions. This plan provides these senior officers the opportunity to earn a short-term bonus of up to a maximum of 50 percent with a target of 30 percent of their base salaries payable each year and long-term deferred awards of up to a maximum of 25 percent of their base salary. Unlike the CEO’s plan, any long-term deferred award to these senior officers is paid into trust only once awarded and is subject to forfeiture if these senior officers resign within three years following the year it was awarded (except for the three senior officers who forfeit any unpaid awards if they leave prior to December 31, 2010). The shortterm bonus shown in the next table for these senior officers reflects the combined short-term bonus earned by these senior officers (including the CEO) in each year. The deferred amounts reflect the combined long-term deferred awards to these senior officers (including the CEO) that were earned each year, together with any gains or losses incurred, in the year identified. These long-term awards are held in trust and are subject to market value fluctuations while held in trust. Therefore, the amount actually paid will reflect any gains/losses while held in trust. These combined amounts paid out under this plan are also described later.

transition as needed throughout 2011. It also includes the residual value of the leased vehicle which was given to the CEO on his retirement. ***The number of senior officers (including the CEO) in 2009 and 2008 and reflected in this table was seven. In 2010, the number of senior officers (including the CEO) is eight and includes the new COO – President and CEO-elect who served during the month of December 2010. The six additional senior officers were added to the Executive Committee during 2008 making a total of 14 senior officers. However, as provided for previously, the compensation of these six more recently appointed senior officers is set out separately in the next table.

Total deferred amounts actually paid to the CEO were $227,707, $255,000, and $255,000 for the years 2010, 2009 and 2008, respectively. These amounts reflect a portion of the total longterm awards earned in prior years that were deferred and remained in trust, along with market gains and losses incurred on those amounts while held in trust. The remaining trust balance of $400,662 will be paid to the CEO in 2011. This payment is the remainder of long-term deferred compensation awards which the CEO earned in 2010 and in prior years but which were held subject to forfeiture had the CEO resigned prior to December 31, 2010. This plan terminated on December 31, 2010.

2010 ANNUAL REPORT

The combined deferred long-term awards actually paid to the initial senior officers (excluding

the 2009 tax returns for Northwest FCS for a fee of $22,700. This non-audit service was approved by

the CEO) were $265,169, $238,972 and $249,130 for the years 2010, 2009 and 2008, respectively.

the Audit Committee. There were no material disagreements with the independent public accoun-

These reflect long-term awards made in 2006, 2005 and 2004, respectively, that were actually

tants on any matter of accounting principles or financial statement disclosure during this period.

paid out in the years noted and include gains/losses on those amounts while held in trust. AUDIT FEES A ND EX PENSES The six more recently appointed senior officers’, who served in 2010, base salaries are adminis-

Fees and expenses incurred by Northwest FCS for audit services rendered by its independent

tered through Northwest FCS’ salary range structure. Salary ranges are assigned to these posi-

auditors, PricewaterhouseCoopers, LLP, for the years ended December 31, 2010, 2009 and 2008,

tions based on competitive data for like positions with similar sized financial institutions. These

were $379,500, $363,000 and $344,300, respectively. These fees and expenses were incurred for

senior officers have short-term bonus/incentive potentials that vary and range from maximums

the annual financial statement audit, including the audit of internal controls over financial report-

of 30 to 45 percent of each of their base salaries. Several of these senior officers also participate

ing as of December 31, 2010, 2009, and 2008.

in various incentive plans, and all participate in a retention program. The total compensation under the programs they participate in is set out in the next table:

F IN A N C IA L S TAT E M E N T S The financial statements, together with the Report of Independent Auditors dated March 7, 2011, and the Report of Management appearing in this annual report are incorporated herein by reference. R E L AT IO N S H IP W IT H CO B A N K , A C B • Northwest FCS’ statutory obligation to borrow from CoBank, ACB is discussed in Note 6. • CoBank, ACB’s ability to access the capital of Northwest FCS is discussed in Note 4. • The major terms of any capital preservation, loss sharing or financial assistance agreements

*These retention figures reflect the amount awarded to these senior officers in 2010, 2009 and 2008. These amounts are not subject to market gains/losses. Therefore, the amount awarded will be the same as the amount actually paid.

between Northwest FCS and CoBank, ACB are discussed in Notes 1 and 7. • A discussion of how the financial condition and results of operations of CoBank, ACB may materially affect stockholder investment in Northwest FCS and Northwest FCS’ investment in

Compensation paid to officers whose compensation exceeds $50,000 is available and will be disclosed to shareholders upon request. O fficers are reimbursed for travel expenses and related expenses while conducting association business.

CoBank, ACB is discussed in Note 1. • CoBank, ACB is required to distribute its annual report to shareholders of Northwest FCS if a “significant event” as defined by FCA regulation occurs.

TRA NSACTIO NS W ITH SENIO R O FFICERS A ND DIRECTO RS Information regarding related party transactions is incorporated herein by reference from Note 10 to the financial statements included in this annual report.

P R IVA C Y P R O T E C T IO N A F F O R D E D U N D E R F C A R E G U L AT IO N S Customer financial privacy and the security of other non-public information are important.

I N V O LV E M E N T I N C E R TA I N L E G A L P R O C E E D I N G S

Therefore, Northwest FCS holds customer financial and other non-public information in strictest

There were no events during the past five years that are material to evaluating the ability or

confidence. Federal regulations allow disclosure of such information by Northwest FCS only in

integrity of any person who served as a director or senior officer on January 1, 2011, or at any

certain situations. Examples of these situations include law enforcement or legal proceedings,

time during 2010.

when such information is requested by a Farm Credit System or other financial institution with which customers do business or consumer reporting agencies.

R E L AT IO N S H IP W IT H IN D E P E N D E N T P U B L IC A U D IT O R S There were no changes in independent public auditors since the prior annual report to stockholders. In addition to audit services, the independent public auditors, PricewaterhouseCoopers, LLP prepared

NORTHWEST FCS

N OR TH W ES T

FARM

CR E D I T

SE R V I CE S,

AC A

DESCRIPTION AND STATUS REPORT ON THE YOUNG, BEGINNING, AND SMALL FARMERS (YBS) PROGRAM Program Definitions Northwest FCS has a specific program in place to serve the credit and related needs of young, beginning, and small farmers and ranchers in our territory. The definitions of young, beginning, and small farmers and ranchers as developed by the Farm Credit Administration follow:

• Young, beginning, small, and minority producers who are actively involved in farming and also those who do not meet traditional credit standards are considered under an outreach loan program known as AgVision. AgVision customers account for more than $177 million of the portfolio loan volume. Through this program, special consideration is given in loan underwriting ratios, interest rate concessions, and origination and appraisal fee waivers. Over $1 million in fee waivers have been provided to AgVision customers since 2001, with $90 thousand waived in 2010. • Northwest FCS small producers are primarily served through Express Financing products. These products are designed with a convenient and efficient delivery method. Small producers are also eligible for the AgVision program. • An advisory group, comprised of young, beginning, and small farmers and ranchers was created to provide Northwest FCS with customer feedback, function as a liaison to association management, and advance YBS program benefits within the agricultural community. • A portion of the young, beginning, and small loan portfolio is supported by government guarantees, including guarantees by the Farm Service Agency (FSA) and USDA’s Business and Industry Guaranteed Loan Program.

• 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 years or less farming or ranching experience as of the loan transaction date. • Small – Any farmer, rancher, producer, or harvester of aquatic products who generates less than $250 thousand in annual gross sales of agricultural or aquatic products.

Mission and Objectives Mission Statement: To advance young, beginning and small farmers’ success via deliberate strategies in lending and professional development. O bjectives of the program: • To support agriculture by encouraging competent YBS customers to enter into or remain in agriculture by supporting their efforts to do so. • To recognize the challenges facing YBS customers attempting to obtain credit and establish a viable enterprise and to establish Northwest FCS as a leader in providing those products and services necessary for them to overcome those challenges. • To develop business relationships with next generation producers who:

° Exhibit the management skills necessary to build a solid financial position.

° Contribute to the agricultural community.

° 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.

Services Provided There are several credit and other related services offered through the Board approved YBS program directly and in coordination with others that allow Northwest FCS to effectively serve the needs within the young, beginning, and small producer segments:

• More than $339 thousand has been reimbursed to customers for education expenses, technology purchases, recordkeeping, and tax planning and preparation services since the 2001 inception of the AgVision program. The reimbursements totaled over $59 thousand in 2010. • The annual Young and Beginning Conference (formerly called AgVision Producer’s Conference) is a two-and-a-half-day conference with emphasis in family communications, global agriculture economics, and strategic planning. • The Understanding Financial Analysis workshop Level 1 is a one-day workshop geared toward enhancing the understanding of balance sheet, income statement, and cash flow projections. The Understanding Financial Analysis workshop Level II is a one-day workshop geared toward moving beyond familiarity with financial statements to understanding financial analysis as an effective tool for making decisions and managing a business. • The Managing Growth and Capital Level III workshop (new in 2010) is a one-day workshop focusing on business growth and the financial impacts on agricultural businesses. • The Financial Statement workshop is a half-day workshop held in Spanish to enhance the understanding of the balance sheet and other financial information. • The Family Business Succession Planning seminar is a two-and-a-half-day workshop emphasizing next generation succession planning. • The Executive Producers Summit is a two-day workshop examining global and agricultural economic trends, family communication, and best management practices. Select customers and prospective customers are invited; a number of those producers fit one or more of the YBS definitions. This conference is held in conjunction with the annual Young and Beginning Conference, so networking can occur between our young producers and our more established producers. • The Northwest FCS Business Management Center helps customers assess, understand, and improve management practices through group and individual interactions via orientations, workshops, and consulting. Many of our YBS customers have taken part in these various workshops. Northwest FCS provides donations and sponsors state and local FFA activities and conventions, state 4-H activities and conventions, and agricultural leadership programs.

2010 ANNUAL REPORT

â&#x20AC;˘ In 2010, Northwest FCS offered twenty-four $1,000 college scholarships to qualified high school seniors and twelve $1,000 scholarships to college juniors or seniors.

The following table provides a breakdown of small farmer and rancher loans by size as of December 31, 2010.

â&#x20AC;˘ Northwest FCS offers many services, including crop insurance, life insurance, and debt-protection, that help our YBS producers mitigate risk.

Region Demographics The local service area of Northwest FCS includes all counties in the states of Washington, Montana, Oregon, Idaho, and Alaska. The following table presents a comparison of the demographic information from the USDAâ&#x20AC;&#x2122;s 2007 Census of Agriculture for young, beginning, and small producers in the territory to the results of the 2002 census. This census is conducted every five years.

There are differences in the methods by which the census demographics and the Northwest FCS data are presented. The census data presentation is based on number of producers, while the Northwest FCS data presentation is based on number of loans. The 2007 Census of Agriculture results show an increase in young and small producers and a decrease in beginning producers from 2002 to 2007 in the service area. The number of young producers increased by 2 percent, the number of beginning farmers decreased by 3 percent, and the number of small producers increased by 1 percent.

Goals and Results Quantitative targets have been established by board policy for young, beginning, and small farmers in loan volume and number of loans based upon demographic data. These targets are shown as follows:

YBS Volume in the Northwest FCS Portfolio The following table outlines the percentage of young and beginning loans in the Northwest FCS loan portfolio (by number) as of December 31, 2010, compared to the total number of loans in the portfolio. The YBS statistics stated in the following tables show an increase in loans made to small customers when compared to 2009 statistics. In 2010, we began including loans purchased from equipment and agribusiness vendors for reporting in our Young, Beginning, and Small customer disclosures. Statistics as stated in prior disclosures did not include these loans. The data in the previous table reveals Northwest FCS met its projections for young, beginning and small producers in number of loans and in loan volume for our small producers. The actual number and volume shown in the table includes loans purchased from equipment and agribusiness vendors that were not included when the goals were established. Although a comparison to actual values without the addition of the purchased loans revealed Northwest FCS did not meet all of the same number and volume projections, Northwest FCS did increase volume and loans made to young and beginning producers by over 3% from 2009. Northwest FCS will continue its mission to advance young, beginning, and small farmers through deliberate lending strategies and professional development opportunities.

NORTHWEST FCS

N OR TH W ES T

FARM

CR E D I T

SE R V I CE S,

AC A

LOCAL ADVISORS

2010 ANNUAL REPORT

N OR TH W ES T

FARM

CR E D I T

SE R V I CE S,

OFFICE LOCATIONS

NORTHWEST FCS

AC A

IN GOOD HANDS

AN AMAZING TEAM

LAYING THE FOUNDATION

PROGRESSIVE LEADERSHIP

BOARD OF DIRECTORS