Northwest Farm Credit Services 2012 Annual Report

Visit us at: northwestfcs.com

2012 Annual Report

OUR STEWARDSHIP CULTUREYou may receive multiple copies of the annual report due to system changes and the need to send annual �nancials to every stockholder of record.

Bruce Nelson Spokane, Washington; Dave Nisbet Bay Center, Washington; Herb Karst Sunburst, Montana; Mark Gehring Salem, Oregon; Drew Eggers Meridian, Idaho;

Rick Barnes Callahan, California; Christy Burmeister-Smith Newman Lake, Washington; Shawn Walters New Dale, Idaho; Kevin Riel Chair – Yakima, Washington;

Jim Farmer Nyssa, Oregon; Dave Hedlin Mt. Vernon, Washington; Karen Schott Vice Chair – Broadview, Montana; Julie Shiflett Spokane, Washington; John Helle Dillon, Montana

Director’s ReportAs business owners in the natural resources industries, we are entrusted stewards of our operations and

resources. The Northwest FCS board, management team and employees share a similar responsibility – to be wise stewards of your cooperative. We must ensure a strong, stable lending organization with capacity to serve generations to come. We engrain stewardship into our governance, management philosophy, business practices and, most importantly, our culture.

2012 was another excellent year for the association. I am proud to report record earnings of $187.3 million due primarily to growth and credit quality improvements in our loan portfolio. Capital increased to $1.6 billion. Consistently strong �nancial performance allows us to provide our customers with a sustainable and reliable patronage program, which reduces their costs of borrowing money. In 2012 the association provided $55.2 million in cash patronage. Since 2000, Northwest FCS has paid $377 million in cash patronage to customers who have provided a signi�cant economic boost to the rural communities we serve.

A key focus of the board has been re�ning our compensation philosophy. Our goal is to support a strong and enduring cooperative that successfully executes our mission to stockholders, while providing competitive income opportunities for employees. This year, we worked with an independent compensation expert who evaluated our existing programs and made recommendations to better align compensation with the sustainable, long-term goals of the organization. We believe the new compensation program will help us continually attract, motivate, and retain the talented employees we need to serve the next generation of agriculture.

On behalf of the Northwest FCS Board we thank our customer-owners for their continued business and look forward to another successful year.

2008 2009 2010 2011 2012

31.1

26.0

36.0

53.355.2

PATRONAGE PAID($ in millions)

BOARD OF DIRECTORSKevin Riel

Board Chair

2 3

Bruce Nelson Spokane, Washington; Dave Nisbet Bay Center, Washington; Herb Karst Sunburst, Montana; Mark Gehring Salem, Oregon; Drew Eggers Meridian, Idaho;

Rick Barnes Callahan, California; Christy Burmeister-Smith Newman Lake, Washington; Shawn Walters New Dale, Idaho; Kevin Riel Chair – Yakima, Washington;

Jim Farmer Nyssa, Oregon; Dave Hedlin Mt. Vernon, Washington; Karen Schott Vice Chair – Broadview, Montana; Julie Shiflett Spokane, Washington; John Helle Dillon, Montana

Director’s ReportAs business owners in the natural resources industries, we are entrusted stewards of our operations and

resources. The Northwest FCS board, management team and employees share a similar responsibility – to be wise stewards of your cooperative. We must ensure a strong, stable lending organization with capacity to serve generations to come. We engrain stewardship into our governance, management philosophy, business practices and, most importantly, our culture.

2012 was another excellent year for the association. I am proud to report record earnings of $187.3 million due primarily to growth and credit quality improvements in our loan portfolio. Capital increased to $1.6 billion. Consistently strong �nancial performance allows us to provide our customers with a sustainable and reliable patronage program, which reduces their costs of borrowing money. In 2012 the association provided $55.2 million in cash patronage. Since 2000, Northwest FCS has paid $377 million in cash patronage to customers who have provided a signi�cant economic boost to the rural communities we serve.

A key focus of the board has been re�ning our compensation philosophy. Our goal is to support a strong and enduring cooperative that successfully executes our mission to stockholders, while providing competitive income opportunities for employees. This year, we worked with an independent compensation expert who evaluated our existing programs and made recommendations to better align compensation with the sustainable, long-term goals of the organization. We believe the new compensation program will help us continually attract, motivate, and retain the talented employees we need to serve the next generation of agriculture.

On behalf of the Northwest FCS Board we thank our customer-owners for their continued business and look forward to another successful year.

2008 2009 2010 2011 2012

31.1

26.0

36.0

53.355.2

PATRONAGE PAID($ in millions)

BOARD OF DIRECTORSKevin Riel

Board Chair

2 3

Customer Capacity We exist to serve customers. Over the years, we’ve been developing the necessary

capacity to not only retain customers but to attract new customers. The �rst priority in serving more than 13,000 customers is to make sure we are creating an experience that leads to high customer engagement. Customer surveys in 2012 continue to re-�ect a high degree of loyalty from our customers, which is a key measure of customer engagement.

Serving young and beginning producers aligns with our business philosophy of stewardship. Our AgVision program has been a reliable source of credit for these pro-ducers since 2001. We know that getting people started in agriculture is more than lending money. It’s providing the education and mentoring that is critical for success in our volatile economy. Our investment in developing our Business Management Center and Knowledge Center is increasingly supporting our customers across the wide spectrum of agriculture.

Growth in quality customers is another important area of customer capacity. In 2012 loan volume grew across all business groups, increasing our total volume owned by 6.2 percent.

Human Resource CapacityServing our customers can’t be done to our high standards without talented and

engaged sta�. Building capacity on the human resource front is essential to having diverse, highly competent and engaged employees who are recognized as trusted advisors of the customers they serve and stewards of the communities where they work and live.

In 2012 we made a number of enhancements aimed at strengthening our human resource capacity, including increased investment in education, performance management systems and aligning our compensation programs with the long-term strategies of this association. Surveying employees about their levels of engagement has become a regular practice. High levels of engagement mean our employees feel valued and supported as they continue to create value for this organization and the customer-owners we serve.

Operations CapacityBehind the scenes, our operational capacity includes funding of loans, processing

loan payments, issuing insurance policies, accounting for expenses and income,

auditing, maintaining our facilities, supporting technology infrastructure, and a host of essential activities. These activities are not always visible to our customers, but the successful completion of this work is vital to our success.

In 2012, we reviewed a large number of internal processes and implemented 30 technology projects. These initiatives were wide ranging including controls, new website, upgrades to online banking, and updating policies and procedures.

Financial CapacityFinancial capacity means having an organization that can handle future customer

needs, can pay an appropriate return to our customer-owners in the form of patron-age, can invest in the business, and does all this in a world that is increasingly volatile.

2012 was a very strong year. Net income was $187.3 million, almost 18 percent above 2011. We had higher loan volumes, better credit quality resulting in a lower provision expense, steady margins on loans, and we received a refund from the Farm Credit System Insurance Fund. Even though credit quality is improving, we continue to maintain a relatively strong allowance for loan losses.

Capital is the other key aspect to our �nancial strength and capacity as it provides for future loan growth, acts as the last line of defense against volatility, and stands behind earnings and loan loss reserves in the area of risk management. In 2012, capital grew to $1.6 billion. We will continue to grow capital and build our �nancial capacity to ensure our customers can depend on us in the long term.

Looking AheadIn 2013, we’ll look closely at our lending standards to make sure we are anticipating

future challenges. Risks around rapidly accelerating land values and the long-range risk of increasing interest rates is concerning. Building our capacity to be a depend-able source of credit and a trusted advisor to the customers we serve is our responsi-bility, our privilege and our sole focus moving forward.

2008 2009 2010 2011 2012

1.11.2

1.31.4

1.6

C APITAL($ in billions)

2008 2009 2010 2011 2012

124.4

106.1

150.1159.2

187.3

NET INCOMEAFTER TAXES($ in millions)

CEO MessageA business philosophy of stewardship has been a part of agriculture for

generations. Stewardship is the careful and responsible management of

what is entrusted to you. As a cooperative, stewardship is the overarching

philosophy of Northwest FCS. When you put words into practice, this

means we e�ectively manage our business and build capacity today, while

constantly focusing on the long-term sustainability of our organization

and its ability to serve the future needs of agriculture.

Building organizational capacity and remaining relevant go hand

in glove. To ensure we are focused on the fundamentals that lead to

a sustainable, durable, and consistently performing business, we’ve

developed our business plan around four key business capacities.Phil DiPofi

President and CEO

4 5

Customer Capacity We exist to serve customers. Over the years, we’ve been developing the necessary

capacity to not only retain customers but to attract new customers. The �rst priority in serving more than 13,000 customers is to make sure we are creating an experience that leads to high customer engagement. Customer surveys in 2012 continue to re-�ect a high degree of loyalty from our customers, which is a key measure of customer engagement.

Serving young and beginning producers aligns with our business philosophy of stewardship. Our AgVision program has been a reliable source of credit for these pro-ducers since 2001. We know that getting people started in agriculture is more than lending money. It’s providing the education and mentoring that is critical for success in our volatile economy. Our investment in developing our Business Management Center and Knowledge Center is increasingly supporting our customers across the wide spectrum of agriculture.

Growth in quality customers is another important area of customer capacity. In 2012 loan volume grew across all business groups, increasing our total volume owned by 6.2 percent.

Human Resource CapacityServing our customers can’t be done to our high standards without talented and

engaged sta�. Building capacity on the human resource front is essential to having diverse, highly competent and engaged employees who are recognized as trusted advisors of the customers they serve and stewards of the communities where they work and live.

In 2012 we made a number of enhancements aimed at strengthening our human resource capacity, including increased investment in education, performance management systems and aligning our compensation programs with the long-term strategies of this association. Surveying employees about their levels of engagement has become a regular practice. High levels of engagement mean our employees feel valued and supported as they continue to create value for this organization and the customer-owners we serve.

Operations CapacityBehind the scenes, our operational capacity includes funding of loans, processing

loan payments, issuing insurance policies, accounting for expenses and income,

auditing, maintaining our facilities, supporting technology infrastructure, and a host of essential activities. These activities are not always visible to our customers, but the successful completion of this work is vital to our success.

In 2012, we reviewed a large number of internal processes and implemented 30 technology projects. These initiatives were wide ranging including controls, new website, upgrades to online banking, and updating policies and procedures.

Financial CapacityFinancial capacity means having an organization that can handle future customer

needs, can pay an appropriate return to our customer-owners in the form of patron-age, can invest in the business, and does all this in a world that is increasingly volatile.

2012 was a very strong year. Net income was $187.3 million, almost 18 percent above 2011. We had higher loan volumes, better credit quality resulting in a lower provision expense, steady margins on loans, and we received a refund from the Farm Credit System Insurance Fund. Even though credit quality is improving, we continue to maintain a relatively strong allowance for loan losses.

Capital is the other key aspect to our �nancial strength and capacity as it provides for future loan growth, acts as the last line of defense against volatility, and stands behind earnings and loan loss reserves in the area of risk management. In 2012, capital grew to $1.6 billion. We will continue to grow capital and build our �nancial capacity to ensure our customers can depend on us in the long term.

Looking AheadIn 2013, we’ll look closely at our lending standards to make sure we are anticipating

future challenges. Risks around rapidly accelerating land values and the long-range risk of increasing interest rates is concerning. Building our capacity to be a depend-able source of credit and a trusted advisor to the customers we serve is our responsi-bility, our privilege and our sole focus moving forward.

2008 2009 2010 2011 2012

1.11.2

1.31.4

1.6

C APITAL($ in billions)

2008 2009 2010 2011 2012

124.4

106.1

150.1159.2

187.3

NET INCOMEAFTER TAXES($ in millions)

CEO MessageA business philosophy of stewardship has been a part of agriculture for

generations. Stewardship is the careful and responsible management of

what is entrusted to you. As a cooperative, stewardship is the overarching

philosophy of Northwest FCS. When you put words into practice, this

means we e�ectively manage our business and build capacity today, while

constantly focusing on the long-term sustainability of our organization

and its ability to serve the future needs of agriculture.

Building organizational capacity and remaining relevant go hand

in glove. To ensure we are focused on the fundamentals that lead to

a sustainable, durable, and consistently performing business, we’ve

developed our business plan around four key business capacities.Phil DiPofi

President and CEO

4 5

MANAGEMENT EXECUTIVE COMMITTEEWe are a diverse group of individuals with di�erent skills and experiences. Many of us grew up on farms or

ranches. Others were raised in larger cities. We have tenured-wisdom in our ranks and fresh, inventive ideas coming

from the next generation. While our roles and responsibilities can be vastly di�erent, when you boil everything

down, we work really hard to take care of our customers, communities and each other.

You might say we’re all about taking care of people and taking care of business.

Ready to meet some amazing people?

They work here.Jim Allen Senior VP-Capital Markets; Stacy Lavin General Counsel; Phil DiPofi President and Chief Executive O�cer; John Phelan Executive VP-Chief Risk O�cer;

Kathy Payne Executive VP-Human Resources and Corporate Administration; Brent Fetsch Senior VP-Chief Strategy O�cer and Chief Information O�cer;

Tom Nakano Executive VP-Chief Financial O�cer; Mark Nonnenmacher Executive VP-Agribusiness; Fred DePell Executive VP-Financial Services

6 7

MANAGEMENT EXECUTIVE COMMITTEEWe are a diverse group of individuals with di�erent skills and experiences. Many of us grew up on farms or

ranches. Others were raised in larger cities. We have tenured-wisdom in our ranks and fresh, inventive ideas coming

from the next generation. While our roles and responsibilities can be vastly di�erent, when you boil everything

down, we work really hard to take care of our customers, communities and each other.

You might say we’re all about taking care of people and taking care of business.

Ready to meet some amazing people?

They work here.Jim Allen Senior VP-Capital Markets; Stacy Lavin General Counsel; Phil DiPofi President and Chief Executive O�cer; John Phelan Executive VP-Chief Risk O�cer;

Kathy Payne Executive VP-Human Resources and Corporate Administration; Brent Fetsch Senior VP-Chief Strategy O�cer and Chief Information O�cer;

Tom Nakano Executive VP-Chief Financial O�cer; Mark Nonnenmacher Executive VP-Agribusiness; Fred DePell Executive VP-Financial Services

6 7

Customer Steve Swank:

“Expanding Rancher”3X Farm

No one knows our

customers better than our front-line people who work with them every day. That’s why our branches

are brimming with talented, caring employees who make our customer service hum. Some of us are

outgoing. Others are more analytical. It takes the synergy of a team to make great things happen.

Angie Stanley:

“Road Warrior”Senior Insurance Agent

18YEARS OFSERVICE

Shaud Schwarzbach: Relationship Manager - Vice President

“Big Sandy Mayor” 5 YEARS OFSERVICE

Growing

RELATIONSHIPSis a key to our success.

When you talk to customer Steve Swank about our employees in Havre, Montana he’ll describe them as a great team who works well together, very professional and highly e�cient. Steve is a pretty good one to ask. He and his business partner Warren Lybeck have more than doubled the size of their wheat and cattle business since they started working with our lending team in 1998.

Every team needs a good point guard and in this case, that’s Relationship Manager Shaud Schwarzbach.He invests time getting to know customers’ busi-nesses from the ground up. That’s where trusted relationships grow. With boots on the ground, he’s able to assess our customers’ needs and see trends impacting their bottom lines.

Heidi Borlaug likes to play behind the scenes. It’s her job to analyze the numbers and put the loan package together. She has a skill for making the complex simple. Using balance sheets, income statements, tax returns, and income projections she helps our customers plan for the future and understand the decisions they make.

Stephannie Klein is a chief multi-tasker. As a �nancial specialist, she works with customers in the branch (and on the phone) to gather �nancials, input data, disburse money, accept payments, and always greets people with a smile. You need to be incredibly organized and extremely passionate about customer service to do Stephannie’s job.

Government rules and regulations can be confus-ing. Yet, Angie Stanley and our crop insurance team always �nd a way to make the information user friendly. Every operation is unique, so Angie helps customers understand what they need to do to get the risk protection they need. Crop insurance isn’t an eight-to-�ve job either. Customers call Angie day, night and weekends. When they need cover-age quickly or they’re hit with a sudden loss, Angie will drive hundreds of miles to help.

1YEAR OFSERVICE

Stephannie Klein:

“Cub Scout Leader”Financial Specialist

8 9

Heidi Borlaug:

“Wheat Farmer”Operations Manager

5YEARS OFSERVICE

Customer Steve Swank:

“Expanding Rancher”3X Farm

No one knows our

customers better than our front-line people who work with them every day. That’s why our branches

are brimming with talented, caring employees who make our customer service hum. Some of us are

outgoing. Others are more analytical. It takes the synergy of a team to make great things happen.

Angie Stanley:

“Road Warrior”Senior Insurance Agent

18YEARS OFSERVICE

Shaud Schwarzbach: Relationship Manager - Vice President

“Big Sandy Mayor” 5 YEARS OFSERVICE

Growing

RELATIONSHIPSis a key to our success.

When you talk to customer Steve Swank about our employees in Havre, Montana he’ll describe them as a great team who works well together, very professional and highly e�cient. Steve is a pretty good one to ask. He and his business partner Warren Lybeck have more than doubled the size of their wheat and cattle business since they started working with our lending team in 1998.

Every team needs a good point guard and in this case, that’s Relationship Manager Shaud Schwarzbach.He invests time getting to know customers’ busi-nesses from the ground up. That’s where trusted relationships grow. With boots on the ground, he’s able to assess our customers’ needs and see trends impacting their bottom lines.

Heidi Borlaug likes to play behind the scenes. It’s her job to analyze the numbers and put the loan package together. She has a skill for making the complex simple. Using balance sheets, income statements, tax returns, and income projections she helps our customers plan for the future and understand the decisions they make.

Stephannie Klein is a chief multi-tasker. As a �nancial specialist, she works with customers in the branch (and on the phone) to gather �nancials, input data, disburse money, accept payments, and always greets people with a smile. You need to be incredibly organized and extremely passionate about customer service to do Stephannie’s job.

Government rules and regulations can be confus-ing. Yet, Angie Stanley and our crop insurance team always �nd a way to make the information user friendly. Every operation is unique, so Angie helps customers understand what they need to do to get the risk protection they need. Crop insurance isn’t an eight-to-�ve job either. Customers call Angie day, night and weekends. When they need cover-age quickly or they’re hit with a sudden loss, Angie will drive hundreds of miles to help.

1YEAR OFSERVICE

Stephannie Klein:

“Cub Scout Leader”Financial Specialist

8 9

Heidi Borlaug:

“Wheat Farmer”Operations Manager

5YEARS OFSERVICE

Customer Dan DeRuyter:

“Progressive Thinker”George DeRuyter & Son Dairy

Customer George DeRuyter:

“Wise Founder”George DeRuyter & Son Dairy

You need honest people you can trust when you’re growing a business or diversifying into new areas. Customers George and Dan DeRuyter rely on our Sunnyside, Washington team to be a sounding board for the decisions they make. In the past 13 years the DeRuyters have expanded their dairy operation to milk more than 5,000 cows (10,900 total) and now grow almost 100 percent of their feed.

When customers want to know how their opera-tion stacks up with others, they can count on honest, helpful perspectives from relationship managers like Craig Shindler. Craig is a trusted advisor. He helps customers get where they want to be without gambling the farm. He’ll ask just the right questions and gather the best information possible to help them position for the opportunities ahead.

Petra Atilano is a no-nonsense woman with a great sense of humor. As a credit o�cer, she keeps everything and everyone on track. She �nds the right products, analyzes the credit, and moves complex loans through the approval process. Customers have con�dence when we say we’re going to get something done, Petra and the team will do it.

Debbie Parker knows people. She has seen just about everything in her 32 years as a �nancial specialist. The team goes to Debbie with questions about di�erent loan documents. She helps us brain-storm solutions for unique situations. If Debbie doesn’t have the answers to help our customers she de�nitely knows the people who do.

Information drives appraisals. The more an appraiser knows about properties sold and purchased the better they can determine real value. Doug Knox and our appraisal team have insights into hundreds of land sales. Customers depend on Doug to give them the objective information they need to make solid business decisions.

10 11

Doug Knox:

“Outdoor Enthusiast”Senior Appraiser

25YEARS OFSERVICE

Debbie Parker:

“Devoted Problem Solver”Financial Specialist

32YEARS OFSERVICE

7YEARS OFSERVICE

Petra Atilano:

“Multilingual Multi-tasker”Credit O�cer - Assistant Vice President

Craig Shindler: Relationship Manager - Assistant Vice President

“Trusted Advisor”7 YEARS OFSERVICE

Customer Dan DeRuyter:

“Progressive Thinker”George DeRuyter & Son Dairy

Customer George DeRuyter:

“Wise Founder”George DeRuyter & Son Dairy

You need honest people you can trust when you’re growing a business or diversifying into new areas. Customers George and Dan DeRuyter rely on our Sunnyside, Washington team to be a sounding board for the decisions they make. In the past 13 years the DeRuyters have expanded their dairy operation to milk more than 5,000 cows (10,900 total) and now grow almost 100 percent of their feed.

When customers want to know how their opera-tion stacks up with others, they can count on honest, helpful perspectives from relationship managers like Craig Shindler. Craig is a trusted advisor. He helps customers get where they want to be without gambling the farm. He’ll ask just the right questions and gather the best information possible to help them position for the opportunities ahead.

Petra Atilano is a no-nonsense woman with a great sense of humor. As a credit o�cer, she keeps everything and everyone on track. She �nds the right products, analyzes the credit, and moves complex loans through the approval process. Customers have con�dence when we say we’re going to get something done, Petra and the team will do it.

Debbie Parker knows people. She has seen just about everything in her 32 years as a �nancial specialist. The team goes to Debbie with questions about di�erent loan documents. She helps us brain-storm solutions for unique situations. If Debbie doesn’t have the answers to help our customers she de�nitely knows the people who do.

Information drives appraisals. The more an appraiser knows about properties sold and purchased the better they can determine real value. Doug Knox and our appraisal team have insights into hundreds of land sales. Customers depend on Doug to give them the objective information they need to make solid business decisions.

10 11

Doug Knox:

“Outdoor Enthusiast”Senior Appraiser

25YEARS OFSERVICE

Debbie Parker:

“Devoted Problem Solver”Financial Specialist

32YEARS OFSERVICE

7YEARS OFSERVICE

Petra Atilano:

“Multilingual Multi-tasker”Credit O�cer - Assistant Vice President

Craig Shindler: Relationship Manager - Assistant Vice President

“Trusted Advisor”7 YEARS OFSERVICE

12 13

You need to wear your credit hat one moment and your marketing hat the next when you’re a regional vice president like Doug Robison. He helps our branch sta� �nd the right �t between credit risk and business opportunity. In his loan approval role, Doug uses a strong credit philosophy. He knows there are opportunities and risks to take. So he works between the lines to �nd the best possible outcome for everyone.

Bill Perry deals in exceptions. Loans that exceed a certain size or risk category are sent to Bill and the prior approval team. He helps customers, one loan at a time. And he’s also bringing clarity and consistency to the way we underwrite credit. New automated processes give our people in the �eld more time to do their jobs and get to loan decisions quicker.

You don’t have to work here long to know change is constant. We’re always stretching to improve. That’s why we need mentors and trainers to share their knowledge and teach us the ropes. Norma Garcia-Park makes sure our processes are consistent. She teaches us how to put loan pack-ages together for review and approval. She has a knack for seeing our unique skill sets and how we need to grow to reach our full potential.

After a loan closes, Erin Wells’ group takes the reins. Some loan servicing actions are normal and routine, like monitoring taxes and insurance. Others require more attention, like requests to release collateral or re-amortize a loan. Erin knows odd things can happen after a loan closes, like construc-tion projects that may not go exactly as planned. That’s why our people in central servicing need to be good problem solvers and creative thinkers.

People have di�erent philosophies about risk. Some are naturally

conservative. Others are more aggressive. That’s why clarity, consistency and �nding common ground is so important

when you’re underwriting credit. No one has a crystal ball. So, when our people make loan decisions, they do so with

thousands of customers in mind who have entrusted us to be wise stewards of their capital.

Balancing

and risk.Doug Robison:

“The Middle Man”Regional Vice President

9YEARS OFSERVICE

12YEARS OFSERVICE

Norma Garcia-Park:

“Team Builder”Assistant Vice President Operations

Erin Wells:

“Team Roper”Vice President Central Servicing

13YEARS OFSERVICE

8YEARS OFSERVICE

Bill Perry:

“Decision Driver”Vice President Credit

12 13

You need to wear your credit hat one moment and your marketing hat the next when you’re a regional vice president like Doug Robison. He helps our branch sta� �nd the right �t between credit risk and business opportunity. In his loan approval role, Doug uses a strong credit philosophy. He knows there are opportunities and risks to take. So he works between the lines to �nd the best possible outcome for everyone.

Bill Perry deals in exceptions. Loans that exceed a certain size or risk category are sent to Bill and the prior approval team. He helps customers, one loan at a time. And he’s also bringing clarity and consistency to the way we underwrite credit. New automated processes give our people in the �eld more time to do their jobs and get to loan decisions quicker.

You don’t have to work here long to know change is constant. We’re always stretching to improve. That’s why we need mentors and trainers to share their knowledge and teach us the ropes. Norma Garcia-Park makes sure our processes are consistent. She teaches us how to put loan pack-ages together for review and approval. She has a knack for seeing our unique skill sets and how we need to grow to reach our full potential.

After a loan closes, Erin Wells’ group takes the reins. Some loan servicing actions are normal and routine, like monitoring taxes and insurance. Others require more attention, like requests to release collateral or re-amortize a loan. Erin knows odd things can happen after a loan closes, like construc-tion projects that may not go exactly as planned. That’s why our people in central servicing need to be good problem solvers and creative thinkers.

People have di�erent philosophies about risk. Some are naturally

conservative. Others are more aggressive. That’s why clarity, consistency and �nding common ground is so important

when you’re underwriting credit. No one has a crystal ball. So, when our people make loan decisions, they do so with

thousands of customers in mind who have entrusted us to be wise stewards of their capital.

Balancing

and risk.Doug Robison:

“The Middle Man”Regional Vice President

9YEARS OFSERVICE

12YEARS OFSERVICE

Norma Garcia-Park:

“Team Builder”Assistant Vice President Operations

Erin Wells:

“Team Roper”Vice President Central Servicing

13YEARS OFSERVICE

8YEARS OFSERVICE

Bill Perry:

“Decision Driver”Vice President Credit

Bottom-line

and accountability. It takes a lot of people

behind the scenes to make our business happen. We process thousands of loans and crop

insurance policies. We carefully review complex documents to make sure we have everything

right. If mistakes happen we �x them quickly. The customers we serve are our fellow employees

in the branches. Accuracy and dependability count when you’re supporting the team.14 15

If you’re buying a house or a piece of equipment you need a loan decision quickly. Kaylee Semprimoznik and her team are ready to help. These experienced underwriters gather the information needed from our branches, make a decision to fund and promptly generate loan documents. Financing unique country home properties is their specialty.

Crop insurance is a complicated business, espe-cially when you’re dealing with complex federal programs. Elisa Wollweber’s team processes cover-age for 45 di�erent crops all with di�erent rules and deadlines. We work with �ve di�erent insurance companies, each with unique software systems and processes. In the event of a loss, you want these people on your team because detail and accuracy count.

Sarah Bogart helps process large, complex, loans that are participated with other lenders. She works with attorneys, title companies, appraisers, and state and local agencies to put loan documents together. You need to be a great thinker with incredible attention to detail to do Sarah’s job. There’s always more than one way to structure a loan with so many moving parts.

When Carol Signalness does her job, customers may not notice. But that’s the way it should be when you’re helping branch sta� serve customers. Carol is one of our go-to people with loan account-ing questions. If there’s a problem with receiving or disbursing funds, or other loan accounting issues, she helps �x it quickly. Carol never gets rattled, even when our stress levels are high. She always says there’s nothing that can’t be �xed and together we solve the issues.

Carol Signalness:

“Trouble Shooter”Operations O�cer

37YEARS OFSERVICE

5YEARS OFSERVICE

Sarah Bogart:

“Detail Thinker”Senior Legal Assistant

Kaylee Semprimoznik:

“Faithful Volunteer”Credit Underwriter

2YEARS OFSERVICE

3YEARS OFSERVICE

Elisa Wollweber:

“Harvest Semi-Driver”Insurance Specialist

Bottom-line

and accountability. It takes a lot of people

behind the scenes to make our business happen. We process thousands of loans and crop

insurance policies. We carefully review complex documents to make sure we have everything

right. If mistakes happen we �x them quickly. The customers we serve are our fellow employees

in the branches. Accuracy and dependability count when you’re supporting the team.14 15

If you’re buying a house or a piece of equipment you need a loan decision quickly. Kaylee Semprimoznik and her team are ready to help. These experienced underwriters gather the information needed from our branches, make a decision to fund and promptly generate loan documents. Financing unique country home properties is their specialty.

Crop insurance is a complicated business, espe-cially when you’re dealing with complex federal programs. Elisa Wollweber’s team processes cover-age for 45 di�erent crops all with di�erent rules and deadlines. We work with �ve di�erent insurance companies, each with unique software systems and processes. In the event of a loss, you want these people on your team because detail and accuracy count.

Sarah Bogart helps process large, complex, loans that are participated with other lenders. She works with attorneys, title companies, appraisers, and state and local agencies to put loan documents together. You need to be a great thinker with incredible attention to detail to do Sarah’s job. There’s always more than one way to structure a loan with so many moving parts.

When Carol Signalness does her job, customers may not notice. But that’s the way it should be when you’re helping branch sta� serve customers. Carol is one of our go-to people with loan account-ing questions. If there’s a problem with receiving or disbursing funds, or other loan accounting issues, she helps �x it quickly. Carol never gets rattled, even when our stress levels are high. She always says there’s nothing that can’t be �xed and together we solve the issues.

Carol Signalness:

“Trouble Shooter”Operations O�cer

37YEARS OFSERVICE

5YEARS OFSERVICE

Sarah Bogart:

“Detail Thinker”Senior Legal Assistant

Kaylee Semprimoznik:

“Faithful Volunteer”Credit Underwriter

2YEARS OFSERVICE

3YEARS OFSERVICE

Elisa Wollweber:

“Harvest Semi-Driver”Insurance Specialist

Our people serve a broad cross-section of agricul-ture. Sharing what we’ve learned from successful customers and industry experts helps all of us manage our business better. That’s where Matt Kloes comes in. He coordinates our Knowledge Center teams, a diverse group of experienced, front-line sta� who work closely with customers in speci�c industries. Matt brings us to-gether to learn from each other. And he helps us share our unique understanding of Northwest agriculture with the customers we serve.

Customers who use our cash management services rely on Kelly Powell to help manage their day-to-day cash �ow. With online tools, customers can sweep excess funds to and from di�erent accounts to pay down their lines of credit or move money into a Future Payment Fund. With the sheer volume of daily activity, customers think of Kelly as a welcome extension to their in-house bookkeeping sta�.

Even with the best preparation, life events can take us by surprise. No one knows this better than Melissa Blumhagen. She has 12 years of insurance experience and helps our customers protect their �nances in the event of a death or disability. She researches underwrit-ing standards from 25 di�erent companies to �nd the right policy at the best rate. And if the unexpected hap-pens, Melissa will be there as your professional advisor, advocate and heart-felt friend.

When you’re ready to build your dream home, chances are you’ll be working with Angela Rapier. She’ll make sure your building experience is smooth – framing, plumbing, electrical, drywall and everything in between. Angela keeps a tight grip on the building process and inspections before she’ll release funds to contractors. But, she has a great working relationship with them. Many are her brothers-in-arms who also served in the military.

Dean Morrow and our credit team work closely with customers who are under �nancial stress for a variety of reasons. Dean’s goal is to help them create a plan to stay in business and repay their debts. Or in rare cases, allow them to gracefully exit the business and move on. Credit o�cers like Dean use compassion, honesty and a dogged pursuit of possibilities to help struggling customers get back on their feet and continue farming.

18 19

Customer relationships don’t end when the loan closes.

In fact, that’s when many of our jobs begin. We’re here to answer questions, solve problems, and make

sure our customers’ plans are coming together the way they envisioned. We keep most loans in our own

portfolio. No one can serve our customers better than the talented people who work here every day.

COOPERATIVEMaximizing our

value.

Dean Morrow:

“Adversity Strategist”Relationship Manager - Vice President

YEARS OFSERVICE

34

3YEARS OFSERVICE

Melissa Blumhagen:

“Crisis Counselor”Insurance & Debt Protection Specialist

2YEARS OFSERVICE

Angela Rapier:

“Navy Veteran”Construction Financial Specialist

25YEARS OFSERVICE

Kelly Powell:

“Money Mover”Senior Funds Management Specialist 5

YEARS OFSERVICE

Matt Kloes:

“World Traveler”Knowledge Center Coordinator

Our people serve a broad cross-section of agricul-ture. Sharing what we’ve learned from successful customers and industry experts helps all of us manage our business better. That’s where Matt Kloes comes in. He coordinates our Knowledge Center teams, a diverse group of experienced, front-line sta� who work closely with customers in speci�c industries. Matt brings us to-gether to learn from each other. And he helps us share our unique understanding of Northwest agriculture with the customers we serve.

Customers who use our cash management services rely on Kelly Powell to help manage their day-to-day cash �ow. With online tools, customers can sweep excess funds to and from di�erent accounts to pay down their lines of credit or move money into a Future Payment Fund. With the sheer volume of daily activity, customers think of Kelly as a welcome extension to their in-house bookkeeping sta�.

Even with the best preparation, life events can take us by surprise. No one knows this better than Melissa Blumhagen. She has 12 years of insurance experience and helps our customers protect their �nances in the event of a death or disability. She researches underwrit-ing standards from 25 di�erent companies to �nd the right policy at the best rate. And if the unexpected hap-pens, Melissa will be there as your professional advisor, advocate and heart-felt friend.

When you’re ready to build your dream home, chances are you’ll be working with Angela Rapier. She’ll make sure your building experience is smooth – framing, plumbing, electrical, drywall and everything in between. Angela keeps a tight grip on the building process and inspections before she’ll release funds to contractors. But, she has a great working relationship with them. Many are her brothers-in-arms who also served in the military.

Dean Morrow and our credit team work closely with customers who are under �nancial stress for a variety of reasons. Dean’s goal is to help them create a plan to stay in business and repay their debts. Or in rare cases, allow them to gracefully exit the business and move on. Credit o�cers like Dean use compassion, honesty and a dogged pursuit of possibilities to help struggling customers get back on their feet and continue farming.

18 19

Customer relationships don’t end when the loan closes.

In fact, that’s when many of our jobs begin. We’re here to answer questions, solve problems, and make

sure our customers’ plans are coming together the way they envisioned. We keep most loans in our own

portfolio. No one can serve our customers better than the talented people who work here every day.

COOPERATIVEMaximizing our

value.

Dean Morrow:

“Adversity Strategist”Relationship Manager - Vice President

YEARS OFSERVICE

34

3YEARS OFSERVICE

Melissa Blumhagen:

“Crisis Counselor”Insurance & Debt Protection Specialist

2YEARS OFSERVICE

Angela Rapier:

“Navy Veteran”Construction Financial Specialist

25YEARS OFSERVICE

Kelly Powell:

“Money Mover”Senior Funds Management Specialist 5

YEARS OFSERVICE

Matt Kloes:

“World Traveler”Knowledge Center Coordinator

Our PurposeTo improve the lives of our customers and employees, the communities where we work and raise our families,

and the Northwest food and �ber industries that perform a vital role in the United States and around the world.

Our Brand PromiseNorthwest Farm Credit Services is your trusted source for �nancial solutions.

No other lender understands agriculture better, and is more committed to its future and that of rural America.

Our Core ValuesRelationships We help rural communities prosper by serving one customer at a time. Knowing our customers and earning their trust is

the foundation for all we do. Being a cooperative, owned and governed by our customers sets us apart. We value diversity in

people and ideas. Our highly valued employees care, communicate well, and always strive to exceed customer expectations.

Integrity Our organization is built on the highest standards of integrity, ethical decision making, and sound internal controls.

Commitment We invest in customers, industries we serve, employees and rural communities. We provide e�ective business solutions that

focus on long-term success. We know what it takes to overcome challenges and value �nancial stability and sound planning.

Knowledge Seeking, interpreting, and sharing knowledge about the industries we serve is part of what makes us unique. We invest in

education for employees, directors and customers to meet changing marketplace needs.

WASHINGTON

Dave AllanMelissa Bedlington-KleindelJe� BosmaRuss ByerleyRoger Can�eldMike CobbBill denHoedRichard DeRuweFrank DeVriesScott EschbachPatrick EscureKevin FilbrunStacy GilmoreAlan Gro�Lori HaylesJim KileCris KincaidJim KlaustermeyerDave KlaveanoTristan KlesickChris KontosSteve KrupkeDavid LangeJosh LawrencePoppie MantoneDan McKayAlan MesmanJohn MillerPat MurphyChuck PodlichJe� RaapSara RolfsDerek SchaferJe� SchilterDanielle ScruppsBen SmithJerry SmithLori StonecipherMark TudorJake WardenaarAndy Werkhoven

YakimaLyndenOutlookTouchetOlympiaEphrateGrandviewDaytonLyndenYakimaQuincyPascoPascoWenatcheePascoSt. JohnPullmanOthelloPomeroyStanwoodWalla WallaReardanColfaxRoyal CityLyleAlmiraMt. VernonToledoChehalisOrondoEllensburgWenatcheeRitzvilleOlympiaRitzvilleSequimBenton CityWalla WallaGrandviewRoyal CityMonroe

OREGON

Monet AllenRoben ArnoldusEd BairLori BaleyTim BareGlenn BarrettJohn BoyerGreg BrinkRon BrownGeorge BussmannWarren ChamberlainTim DahleDan DawsonMike DeWallSusan DoverspikeRod FesslerJoe FineganBruce FordSkip GrayDennis HarmonRon HjortGary HullMatt InskoKenneth JensenAlan KeudellMark KrautmannDavid KunkelLeland LageDan C. LewisSharon LivingstonBill MartinScott McClaranRon MeyerGreg MyersDavid NealMary OlsonLarry ParkerAlan ParksAmy Doer�er PhelanVikki PriceJohn ReerslevStephen RothShannon RustAnna SullivanSteve Walker

Grenada, CACoveKlamath FallsMalinRoseburgBonanzaHainesJosephMilton-FreewaterSixesValeThe DallesRoseburgHarrisburgBurnsMadrasCorneliusHermistonAlbanyGrants PassOaklandLebanonLaGrandeValeAumsvilleSalemPortlandHood RiverGastonMt. VernonRufusJosephTalentTillamookTangentMonmouthHelixSilver LakeAumsvilleNyssaJunction CityBrothersEchoHerefordStan�eld

IDAHO

Robert BallCody BinghamJe� Blanksma, Jr.Adrian BoerRay CarlsonBill ClaytonCade CrapoRon ElkinCarl EllsworthDavid FunkLeRoy FunkBrent Gri�nJohn HeptonJackie HillmanBrian HuettigKen KoompinKaren LustigMarty LuxDan MaderRay MatsuuraKyle MeyerRon MioGreg MossKirk NickersonJe� PahlLisa PattersonErick PetersonDavid RallisonD. Brad ReedNate RiggersDoug Ru�Royce SchwenkfelderKirt SchwiederScott SearleTodd SimmonsRobert SwainstonRyan TelfordBernie TeunissenDale ThomasCamellia ThurgoodJustin TindallSteven TooneJames UdyTodd WebbShawn WebsterBerkley Wray

HamerJeromeHammettJeromeBlackfootWilderSt. AnthonyBuhlLeadoreHansenBurleyRupertNampaHamerHazeltonAmerican FallsCottonwoodNezperceGeneseeBlackfootRathdrumFruitlandKetchumHowePocatelloHeyburnMoscowFranklinIdaho FallsNez PerceAberdeenCambridgeIdaho FallsShelleyTerretonPrestonRich�eldCaldwellGoodingNampaBruneauGraceAmerican FallsDecloRexburgBlackfoot

MONTANA

Les ArthunBill Bergin, Jr.Adam BillmayerBart BitzKeven BradleySandy CareyTom CheethamCalvin DanreutherNels DeBruyckerVicki EggebrechtWarren FlynnConni FrenchJoe FretheimBeth Granger Greg GroveChad HansenCourtney HerzogCraig HenkeDale HirschCraig IversonTim JohnsonAlan KlempelPaul KronebuschTim LakeBill Lauckner, Jr.Kirk MontgomeryBryan MussardCorie MydlandTracy MyttyTracey PearceShawn RettigScott Ru�Dave SattorivaNancy SchleppDennis SchmiererKim SkinnerCarmie Ste�esSteve SwankKurt SwansonDuane TalcottDale TarumBob TaylorMiles TorskeCarl TraeholtBrian TutvedtLarry Tveit, Jr.Bruce UdelhovenJe� VolfMike WalleweinSteve Wood

WilsallMelstoneHogelandBig SandyCut BankBoulderRedstoneLomaChoteauMaltaTownsendMaltaShelbyGreat FallsMoccasinDillonRapeljeChesterKinseyWinnettDuttonBloom�eldConradPolsonNashuaRosebudDillonJolietFlorenceTwin BridgesRudyardCusterHinghamRinglingSavageHallPlevnaChinookValierHammondRichlandDentonHardinWolf PointKalispellFairviewWinifredJudith GapSunburstSheridan

Northwest FCS Local Advisors

20 21

Our PurposeTo improve the lives of our customers and employees, the communities where we work and raise our families,

and the Northwest food and �ber industries that perform a vital role in the United States and around the world.

Our Brand PromiseNorthwest Farm Credit Services is your trusted source for �nancial solutions.

No other lender understands agriculture better, and is more committed to its future and that of rural America.

Our Core ValuesRelationships We help rural communities prosper by serving one customer at a time. Knowing our customers and earning their trust is

the foundation for all we do. Being a cooperative, owned and governed by our customers sets us apart. We value diversity in

people and ideas. Our highly valued employees care, communicate well, and always strive to exceed customer expectations.

Integrity Our organization is built on the highest standards of integrity, ethical decision making, and sound internal controls.

Commitment We invest in customers, industries we serve, employees and rural communities. We provide e�ective business solutions that

focus on long-term success. We know what it takes to overcome challenges and value �nancial stability and sound planning.

Knowledge Seeking, interpreting, and sharing knowledge about the industries we serve is part of what makes us unique. We invest in

education for employees, directors and customers to meet changing marketplace needs.

WASHINGTON

Dave AllanMelissa Bedlington-KleindelJe� BosmaRuss ByerleyRoger Can�eldMike CobbBill denHoedRichard DeRuweFrank DeVriesScott EschbachPatrick EscureKevin FilbrunStacy GilmoreAlan Gro�Lori HaylesJim KileCris KincaidJim KlaustermeyerDave KlaveanoTristan KlesickChris KontosSteve KrupkeDavid LangeJosh LawrencePoppie MantoneDan McKayAlan MesmanJohn MillerPat MurphyChuck PodlichJe� RaapSara RolfsDerek SchaferJe� SchilterDanielle ScruppsBen SmithJerry SmithLori StonecipherMark TudorJake WardenaarAndy Werkhoven

YakimaLyndenOutlookTouchetOlympiaEphrateGrandviewDaytonLyndenYakimaQuincyPascoPascoWenatcheePascoSt. JohnPullmanOthelloPomeroyStanwoodWalla WallaReardanColfaxRoyal CityLyleAlmiraMt. VernonToledoChehalisOrondoEllensburgWenatcheeRitzvilleOlympiaRitzvilleSequimBenton CityWalla WallaGrandviewRoyal CityMonroe

OREGON

Monet AllenRoben ArnoldusEd BairLori BaleyTim BareGlenn BarrettJohn BoyerGreg BrinkRon BrownGeorge BussmannWarren ChamberlainTim DahleDan DawsonMike DeWallSusan DoverspikeRod FesslerJoe FineganBruce FordSkip GrayDennis HarmonRon HjortGary HullMatt InskoKenneth JensenAlan KeudellMark KrautmannDavid KunkelLeland LageDan C. LewisSharon LivingstonBill MartinScott McClaranRon MeyerGreg MyersDavid NealMary OlsonLarry ParkerAlan ParksAmy Doer�er PhelanVikki PriceJohn ReerslevStephen RothShannon RustAnna SullivanSteve Walker

Grenada, CACoveKlamath FallsMalinRoseburgBonanzaHainesJosephMilton-FreewaterSixesValeThe DallesRoseburgHarrisburgBurnsMadrasCorneliusHermistonAlbanyGrants PassOaklandLebanonLaGrandeValeAumsvilleSalemPortlandHood RiverGastonMt. VernonRufusJosephTalentTillamookTangentMonmouthHelixSilver LakeAumsvilleNyssaJunction CityBrothersEchoHerefordStan�eld

IDAHO

Robert BallCody BinghamJe� Blanksma, Jr.Adrian BoerRay CarlsonBill ClaytonCade CrapoRon ElkinCarl EllsworthDavid FunkLeRoy FunkBrent Gri�nJohn HeptonJackie HillmanBrian HuettigKen KoompinKaren LustigMarty LuxDan MaderRay MatsuuraKyle MeyerRon MioGreg MossKirk NickersonJe� PahlLisa PattersonErick PetersonDavid RallisonD. Brad ReedNate RiggersDoug Ru�Royce SchwenkfelderKirt SchwiederScott SearleTodd SimmonsRobert SwainstonRyan TelfordBernie TeunissenDale ThomasCamellia ThurgoodJustin TindallSteven TooneJames UdyTodd WebbShawn WebsterBerkley Wray

HamerJeromeHammettJeromeBlackfootWilderSt. AnthonyBuhlLeadoreHansenBurleyRupertNampaHamerHazeltonAmerican FallsCottonwoodNezperceGeneseeBlackfootRathdrumFruitlandKetchumHowePocatelloHeyburnMoscowFranklinIdaho FallsNez PerceAberdeenCambridgeIdaho FallsShelleyTerretonPrestonRich�eldCaldwellGoodingNampaBruneauGraceAmerican FallsDecloRexburgBlackfoot

MONTANA

Les ArthunBill Bergin, Jr.Adam BillmayerBart BitzKeven BradleySandy CareyTom CheethamCalvin DanreutherNels DeBruyckerVicki EggebrechtWarren FlynnConni FrenchJoe FretheimBeth Granger Greg GroveChad HansenCourtney HerzogCraig HenkeDale HirschCraig IversonTim JohnsonAlan KlempelPaul KronebuschTim LakeBill Lauckner, Jr.Kirk MontgomeryBryan MussardCorie MydlandTracy MyttyTracey PearceShawn RettigScott Ru�Dave SattorivaNancy SchleppDennis SchmiererKim SkinnerCarmie Ste�esSteve SwankKurt SwansonDuane TalcottDale TarumBob TaylorMiles TorskeCarl TraeholtBrian TutvedtLarry Tveit, Jr.Bruce UdelhovenJe� VolfMike WalleweinSteve Wood

WilsallMelstoneHogelandBig SandyCut BankBoulderRedstoneLomaChoteauMaltaTownsendMaltaShelbyGreat FallsMoccasinDillonRapeljeChesterKinseyWinnettDuttonBloom�eldConradPolsonNashuaRosebudDillonJolietFlorenceTwin BridgesRudyardCusterHinghamRinglingSavageHallPlevnaChinookValierHammondRichlandDentonHardinWolf PointKalispellFairviewWinifredJudith GapSunburstSheridan

Northwest FCS Local Advisors

20 21

IDAHO

73 Fort Hall Avenue, Suite AAmerican Falls, ID 83211208-226-1340

370 North Meridian Street, Suite ABlackfoot, ID 83221208-782-3800

1408 Pomerelle Avenue, Suite BBurley, ID 83318-2064208-678-6650

501 King StreetCottonwood, ID 83522208-962-2280

2225 West Broadway, Suite AIdaho Falls, ID 83402208-552-2300

2631 Nez Perce Drive, Suite 201Lewiston, ID 83501208-799-4800

16034 Equine DriveNampa, ID 83687208-468-1600

102 North State, Suite 2Preston, ID 83263208-852-2145

1036 Erikson DriveRexburg, ID 83440208-656-2100

815 North College RoadTwin Falls, ID 83303208-732-1000

139 River Vista Place, Suite 201Twin Falls, ID 83301208-732-1000

MONTANA

Tech Plaza, Building 1, Suite 3003490 Gable RoadBillings, MT 59108406-651-1670

1001 West Oak, Farm Credit Building, Suite 200Bozeman, MT 59772406-556-7300

519 South MainConrad, MT 59425406-278-4600

38 A South Central AvenueCut Bank, MT 59427406-873-9070

134 East Reeder StreetDillon, MT 59725406-683-1200

501 First Avenue SouthGlasgow, MT 59230406-228-3900

700 River Drive SouthGreat Falls, MT 59405406-268-2200

1705 Hwy 2 NW, Suite AHavre, MT 59501406-265-7878

120 Wunderlin Street, Suite 6Lewistown, MT 59457406-538-7737

502 South HaynesMiles City, MT 59301406-233-3100

3021 Palmer Street, Suite BMissoula, MT 59808406-532-4900

123 North Central AvenueSidney, MT 59270406-433-3920

OREGON

3370 10th Street, Suite BBaker City, OR 97814541-524-2920

2345 NW Amberbrook Drive, Suite 100Beaverton, OR 97006503-844-7920

650 E Pine, Suite 106ACentral Point, OR 97502541-665-6100

2911 Tennyson Avenue, Suite 301Eugene, OR 97408541-685-6140

300 Klamath Avenue, Suite 200Klamath Falls, OR 97601541-850-7500

308 SE 10th StreetOntario, OR 97914541-823-2660

12 Southwest NyePendleton, OR 97801541-278-3300

3113 S Highway 97, Suite 100Redmond, OR 97756541-504-3500

2222 NW Kline StreetRoseburg, OR 97471541-464-6700

650 Hawthorn Avenue SE, Suite 210Salem, OR 97309-9831503-373-3000

3591 Klindt Drive, Suite 110The Dalles, OR 97058541-298-3400

WASHINGTON

265 East George Hopper RoadBurlington, WA 98233 360-707-2353

629 South Market BoulevardChehalis, WA 98532360-767-1100

224 North Main StreetColfax, WA 99111509-397-2840

667 Grant Road, Suite 1East Wenatchee, WA 98802509-665-2160

1501 East Yonezawa BlvdMoses Lake, WA 98837509-764-2700

9530 Bedford StreetPasco, WA 99301509-542-3720

201 W Broadway Avenue, Suite BRitzville, WA 99169509-659-1105

1900 West Nickerson Street, Ste 215Seattle, WA 98119206-691-2000

1515 S Technology Blvd, Suite BSpokane, WA 99224509-340-5600

2735 Allen RoadSunnyside, WA 98944509-836-3080

1 West PineWalla Walla, WA 99362509-525-2400

1360 North 16th AvenueYakima, WA 98902509-225-3200

Northwest FCSHeadquarters

1700 S. Assembly StreetSpokane, Washington 99220(509) 340-5300

Northwest FCS Office Locations

22

2012 NORTHWEST FARM CREDIT SERVICES, ACA Annual Report to Stockholders

2012 ANNUAL REPORT 23

N O R T H W E S T F A R M C R E D I T S E R V I C E S , A C A

REPORT OF MANAGEMENT The financial statements of Northwest Farm Credit Services, ACA and its wholly owned subsidiaries

(Northwest FCS) are prepared by management, who is responsible for their integrity and

objectivity, including amounts necessarily based on judgments and estimates. The financial

statements have been prepared in conformity with accounting principles generally accepted in the

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

of Northwest FCS. Other financial information included in the 2012 Annual Report to Stockholders

is consistent with that in the financial statements.

To meet its responsibility for reliable financial information, management depends on Northwest

FCS’ accounting and internal control systems, which have been designed to provide reasonable,

but not absolute, assurances that assets are safeguarded and transactions are properly authorized

and recorded. The systems have been designed to recognize the cost must be related to the

benefits derived. To monitor compliance, the Internal Audit staff performs audits of the accounting

records, reviews accounting systems and internal controls, and recommends improvements as

appropriate. The financial statements are audited by PricewaterhouseCoopers LLP, independent

auditors, who, as part of the audit process, also conduct an audit of internal controls to obtain a

sufficient understanding of the internal control structure in order to establish a basis for reliance

thereon in determining the nature, extent, and timing of procedures applied to the audit of the

financial statements. Northwest FCS is also examined by the Farm Credit Administration.

The Chief Executive Officer, as delegated by the Northwest FCS Board of Directors, has overall

responsibility for Northwest FCS’ system of internal controls and financial reporting. The Board has

delegated significant responsibility to the Audit Committee, which is comprised entirely of directors

who are independent of Northwest FCS’ management. The Audit Committee is responsible for

recommending to the Board the selection of independent auditors. It meets periodically with

management, the independent auditors, and the internal auditors to ensure they are carrying out

their responsibilities. The Audit Committee is also responsible for performing an oversight role by

reviewing and monitoring the financial, accounting, and auditing procedures of Northwest FCS in

addition to reviewing Northwest FCS’ financial reports. The independent auditors and the internal

auditors have full and free access to the Audit Committee, with or without the presence of

management, to discuss the adequacy of the internal control structure for financial reporting and

any other matters they believe should be brought to the attention of the committee.

The undersigned certify the 2012 Annual Report to Stockholders has been prepared in accordance

with all applicable statutory or regulatory requirements and the information contained herein is

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

Phil DiPofi

President and CEO

March 1, 2013

Tom Nakano

Executive VP-CFO

March 1, 2013

Kevin Riel

Chair of the Board

March 1, 2013

24 NORTHWEST FCS


MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of Northwest FCS is responsible for establishing and maintaining adequate internal

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

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

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

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

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

information and the preparation of the consolidated financial statements for external purposes in

accordance with accounting principles generally accepted in the United States of America and

includes those policies and procedures that: (1) pertain to the maintenance of records that in

reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of

Northwest FCS, (2) provide reasonable assurance that transactions are recorded as necessary to

permit preparation of financial information in accordance with accounting principles generally

accepted in the United States of America, and that receipts and expenditures are being made only

in accordance with authorizations of management and directors of Northwest FCS, and (3) provide

reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or

disposition of Northwest FCS’ assets that could have a material effect on its consolidated financial

statements.

Northwest FCS’ management has completed an assessment of the effectiveness of internal control

over financial reporting as of December 31, 2012. 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, 2012, the

internal control over financial reporting was effective. Additionally, based on this assessment,

Northwest FCS determined there were no material weaknesses in the internal control over financial

reporting as of December 31, 2012.

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.

Phil DiPofi

President and CEO

March 1, 2013

Tom Nakano

Executive VP-CFO

March 1, 2013

Kevin Riel

Chair of the Board

March 1, 2013



REPORT OF AUDIT COMMITTEE The Audit Committee is composed of six members of the Northwest FCS Board of Directors. In

2012, 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 recommendations

arising from those auditing activities. In addition, the Audit Committee approved the appointment

of PricewaterhouseCoopers LLP (PwC) as our independent auditors for 2012. The Audit

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

Committee Operating Statement.

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 for issuing its report

based on the audit. The Audit Committee’s responsibilities include monitoring and overseeing these

processes.

In this context, the Audit Committee reviewed and discussed the audited financial statements for

the year ended December 31, 2012, 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 2012, PwC was not engaged for non-audit services. The Audit

Committee has discussed with management and PwC such other matters and received such

assurances from them as the Audit Committee deemed appropriate.

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, 2012.

Christy Burmeister-Smith

Chair of the Audit Committee

March 1, 2013

Shawn Walters

Herb Karst

Dave Hedlin

John Helle

Karen Schott

26 NORTHWEST FCS



MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion summarizes the financial position and results of operations of Northwest

Farm Credit Services, an Agricultural Credit Association, and its wholly-owned subsidiaries

(collectively referred to as Northwest FCS) for the year ended December 31, 2012. Comparisons

with prior years are included. The commentary should be read in conjunction with the

accompanying financial statements and footnotes. The financial statements were prepared under

the oversight of the Audit Committee.

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

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

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

743-2125.

Dollar amounts are in thousands unless otherwise stated.

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 be realized. These forward-looking statements are based on current

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

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

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

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

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

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

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

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

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

privacy protections through legislation or regulation; the resolution of legal proceedings and

related matters; and nonperformance by counterparties to derivative positions.

Business Overview Farm Credit System Structure and Mission

As of December 31, 2012, we are one of 82 associations in the Farm Credit System (System),

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

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

ranchers, and producers or harvesters of aquatic products and farm-related businesses through a

member-owned cooperative system. This is done by making loans and providing financial services.

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

portfolio of agricultural loans of any lender in the United States. The Farm Credit Administration

(FCA) is the System’s independent safety and soundness federal regulator and was established to

supervise, examine and regulate System institutions.

Our Structure and Focus

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

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

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

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

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

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

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

level of satisfaction we provide our customers.

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

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

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

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

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

financial position or presentation of financial information for Northwest FCS.

28 NORTHWEST FCS

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

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

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

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

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

2012 Financial Highlights The year ended December 31, 2012 reflected positive financial performance. Record earnings and

a strong capital position allowed us to declare a cash patronage distribution of $55.2 million

representing a return of approximately 75 basis points for the majority of our eligible customers

based on their average 2012 loan balances. Other highlights include:

• Net income for the year was $187.3 million, up 17.7 percent from 2011. This increase was

driven by a rise in net interest income over 2011, achieved largely from loan growth and

lower funding costs, and a reduced provision for credit loss expense when compared to the

prior year. In addition, we received an $11.2 million refund in 2012 for premiums previously

paid to the Farm Credit System Insurance Corporation.

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

31, 2012, our members’ equity totaled approximately $1.6 billion, and our permanent capital

ratio was 13.4 percent.

• Our loan portfolio volume increased in 2012, with an ending gross loan and accrued interest

balance of $9.1 billion, an increase of 6.2 percent.

• Credit quality improved in 2012 as compared to 2011, and we anticipate this positive trend to

continue. Producers in certain industries struggled in 2012 with drought, lower commodity

prices and the overall U.S. economic environment, resulting in required allowance for loan

losses. However, the majority of our customers remained strong and well positioned entering

2013.

Commodity Review and Outlook The Northwest agricultural industry remains strong, supported by producers’ financial strength and

favorable markets. Exceptions include continued volatility in dairy markets and low open market

potato prices.

Strong yields and markets created an outstanding year for most wheat producers. Eastern and

southern Montana were exceptions, where drought reduced yields. Wheat markets face varying

influences, supported by a drought-stricken crop in the U.S. southern and central plains, but

pressured by ample wheat supplies and projections for increased wheat acres in 2013.

Sugar beet and onion growers were also profitable, while potato producers’ margins were

profitable on contracted potatoes. While contract potato prices are profitable, prices for potatoes

sold in the open market are below producers’ breakeven points. Sugar prices are expected to

moderate from recent highs, limited by higher global production and rising ending stocks.

Hay prices were strong, bolstered by tight supplies and strong exports. Despite increased costs for

rent, fertilizer, fuel and other inputs, hay growers were profitable in 2012. Strong hay, corn and

soybean prices, matched with volatile milk markets, resulted in inconsistent financial results for

dairies in 2012. Fourth quarter beef cattle markets were relatively strong following a turbulent

third quarter. Tight supplies continue to favor cow/calf producers, but limit gains for stockers and

feeders.

Favorable fall weather extended apple and pear harvests and minimized disruptions related to

labor supply constraints. The Northwest 2012/2013 fresh apple crop is 18.6 percent above the

previous record set in 2009/2010. However, short Northern Hemisphere apple supplies due to poor

crops in Michigan and the northeastern U.S. are driving market prices above historic seasonal

levels. Pear markets are supported by a smaller crop and good overall quality. Cherry growers’

bottom lines are less favorable. Although producers with strong tonnage, minimal cost and large-

sized, quality fruit experienced good returns, some producers struggled to break even. Favorable

weather in Washington and Oregon resulted in a record Washington wine grape harvest and

exceptional quality in Oregon. Wine grape and wine prices are strong, supported by a slight decline

in global acreage and increasing wine consumption.

An improving domestic economy is boosting nursery and greenhouse operators’ and forest

products producers’ profits. Most nursery and greenhouse operators were profitable in 2012.

Bookings are up significantly for spring 2013 shipments and supply shortages are creating

increased sales opportunities. Higher domestic lumber demand increased U.S. lumber production

and imports during the second half of 2012. Log prices remained at or below 2011 prices for most

of the year, increasing mills’ operating margins. However, log costs are expected to increase in

2013.


For more information on our industries served visit the Northwest FCS Knowledge Center at

www.northwestfcs.com.

Loan Portfolio Total loans and accrued interest outstanding were $9.1 billion at December 31, 2012, an increase

of $525.9 million, or 6.2 percent from the December 31, 2011 balance of $8.5 billion. During 2011,

total loans and accrued interest increased $29.8 million or 0.3 percent, from $8.5 billion at

December 31, 2010.

In 2012, our growth came primarily from existing customer expansion in land and capital

improvements, whereas during 2010 and 2011, our customer base remained fairly conservative in

terms of expansion. In addition, there had been above average profitability in many of the core

commodities, which allowed many producers to reduce reliance on operating funding in

2010/2011. Loans and accrued interest by type are as follows:

Real estate mortgage loans increased by $256,715, or 6.8 percent, during the year ended

December 31, 2012 as compared to December 31, 2011. Energy loans increased $125,760, or

121.6 percent, as compared to December 31, 2011.

Loan concentration by state as of December 31 was as follows:

Gross loans, impaired loans and related accrued interest for the past three years are presented in

the following table:

Overall high risk loans and interest decreased $72,649, or 24.5 percent, during the year ended

December 31, 2012 as compared to December 31, 2011. The majority of this decrease related to

nonaccrual loans, which decreased $73,029 or 30 percent, as compared with December 31, 2011,

primarily due to an improvement in the credit quality of loans to borrowers in certain agricultural

sectors.

The following table reflects activity within the nonaccrual loan portfolio:

30 NORTHWEST FCS

As of December 31, 2012, nonaccrual loans that were current as to principal and interest

installments totaled $125,206 representing 73.5 percent of the nonaccrual loan portfolio compared

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

$204,702 representing 74.2 percent of the nonaccrual loan portfolio at December 31, 2010.

Additional loan information is in Note 3 to the Consolidated Financial Statements, Loans and

Allowance for Loan Losses.

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

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

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

for credit losses is determined based on a periodic evaluation of the loan portfolio and unfunded

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

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

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

based on a historical loss model that takes into consideration risk characteristics of our various

loan portfolios. We evaluate the reasonableness of this model and determine whether adjustments

to the allowance are appropriate to reflect the risks inherent in the portfolio.

Individual loans are evaluated based on the borrower’s overall financial condition, resources, and

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

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

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

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

regulatory oversight, geographic, industry and other factors.

We maintain a contingency loss on unfunded commitments. The contingency loss reflects our best

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

Factors such as the likelihood of disbursements and the likelihood of losses given disbursement are

utilized in determining this contingency. This reserve is reported within other liabilities on the

Consolidated Balance Sheet and totaled $12,000 at December 31, 2012 and 2011 and $7,000 at

December 31, 2010.

The ALL reserves at December 31, 2012, 2011, and 2010 totaled $128,000, $126,500, and

$111,000, respectively. Specific loan loss reserves at December 31, 2012, 2011, and 2010 totaled

$47,971, $31,679, and $32,380, respectively. At December 31, 2012, this reserve is primarily

comprised of those agricultural sectors that continue to be impacted by volatility in commodity and

input prices, such as dairy, as well as those industries, such as nursery, that are impacted by the

overall downturn in the U.S. economy. Coverage of the ALL, as a percentage of certain key loan

categories, is presented in the following table:

Results of Operations Our net income for the year ended December 31, 2012, was $187,255, compared to $159,156 for

2011 and $150,064 for 2010. The following table provides detail of changes in the components of

our net income:

Net Interest Income: Net interest income was $6,472 higher in 2012 compared to 2011

primarily due to an increase in average loan volume, increased income from nonaccrual loans and

a decrease in the cost of funds. The cost of funds was impacted by the composition of the balance

sheet and the amount of equity available to fund loan volume. These items were partially offset by

a decrease in loan spread caused in part by greater prepayment expense, competitive pressures,

and lower interest rates. Net interest income was $13,862 higher in 2011 compared to 2010

primarily due to improved spread resulting from decreased funding costs. The improvement in

spread resulted from callable debt being called and replaced at lower interest rate levels, as well as

some floating rate debt repricing at a lower rate of interest. To a lesser extent, the change in net

interest income was also impacted by the composition of the balance sheet and the amount of

equity available for funding loan volume, which was influenced by decreased loan demand in 2011.

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

earning assets and interest-bearing liabilities between the years ended December 31, 2012, and


2011, and between the years ended December 31, 2011, and 2010, are presented in the following

table:

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

portfolio during 2012, 2011, and 2010 are presented in the following table:

Provision for credit losses: In recent years, our charge-offs, nonaccrual loans, and adverse

loans have been higher than our historical averages. Borrower distress led to higher allowance

levels and provisions for credit losses had a material impact to net income. The larger provision for

credit losses the past three years were due to the challenges facing certain agricultural sectors,

primarily dairy producers and nurseries. Charge-offs net of recoveries totaled $28,990, $26,841,

and $48,056 in 2012, 2011, and 2010, respectively.

Noninterest income: The increase in noninterest income of $15,037 in 2012 when compared to

2011 was primarily due to $11,238 in refunds received in 2012 from the Farm Credit System

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

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

and Operations, when the Insurance Fund exceeds the statutory 2 percent secure base amount,

the Insurance Corporation evaluates the insurance premium assessment rate for Farm Credit

System banks and may refund excess amounts. The Insurance Fund ended 2011 above the secure

base amount, and consequently in the second quarter of 2012, the Insurance Corporation

distributed to Farm Credit entities the excess amount. No similar refunds were received in 2011

and $9,312 of similar refunds were received in 2010. These refunds are recorded in Other income

on the Consolidated Statement of Income. Financially related services increased $2,336, or 17.6

percent as compared to 2011 related mainly to $2,147 received from profit sharing with insurance

companies from the 2011 crop year.

Operating expense: In 2012, operating expenses increased by $9,000 when compared to 2011.

The change is related mainly to salaries and benefits which increased $10,620 as compared to the

prior year. Salaries and benefits include normal annual salary increases, increased incentive

expenses for anticipated payouts related to 2012 performance and increased recognized expense

related to the defined benefit plan. This increase was partially offset by a decrease in Other

operating expense of $2,008 when compared to 2011. This decrease is attributed to higher

deferred loan origination costs and a decline in credit enhancement premiums as compared to the

prior year. Other operating expense also includes an additional $1,000 related to a previously

existing contingent liability related to revenue taxes. Decreases in operating expenses were in

occupancy and equipment and insurance fund premiums.

Operating expenses increased by $4,464 in 2011 compared to 2010. Factors contributing to this

increase when compared to the previous year were increases in purchased services, occupancy

and equipment, salaries, and other expenses. Purchased services were higher than the previous

year primarily due to a one-time retention payment made to the former CEO to assist with the

transition in 2011, as well as technology related initiatives and services provided by Farm Credit

Financial Partners, Inc. Salaries were higher due to normal annual salary increases, one-time

payments to selected individuals and retiring senior management, and greater than anticipated

payouts related to 2010 performance. These expenses were offset by a decrease in employee

benefits due primarily to a decrease in amortization of past actuarial plan losses on the defined

benefit plan. Other operating expense increased over the prior year due primarily to a contingent

liability of $2,000 related to revenue taxes.

Other noninterest expense: Other noninterest expense decreased $1,882 in 2012 when

compared to 2011. The majority of this decrease was attributed to losses related to other property

owned which were smaller in 2012 than 2011. In 2011, carrying values were reduced on several

assets held in other property owned and losses were recognized on properties sold throughout the

year. In 2010, no significant carrying value adjustments were recorded.

32 NORTHWEST FCS

Provision for income taxes: Income tax expense was $3,143 higher than in the previous year.

The effective tax rate was 4.8 percent for the year ended December 31, 2012 as compared to 3.8

percent for 2011. Contributing to the increase was a $1.0 million uncertain tax position recorded in

the year ended December 31, 2012 related to a state tax position. The remaining increase in taxes

is primarily related to non-patronage sourced income from our taxable entity. The tax expense in

2011 increased $3,064 as compared to 2010 primarily due to increased non-patronage sourced

income from our taxable entity and adjustments to our net deferred tax asset.

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

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

Consolidated Financial Statements, Note Payable to CoBank, ACB, this direct loan is governed by a

General Financing Agreement (GFA) and is collateralized by a pledge of substantially all of our

assets and is also subject to regulatory borrowing limits. The GFA includes financial and credit

metrics that if not maintained can result in increases to our funding costs. The GFA also requires

us to comply with FCA regulations regarding liquidity. To meet this requirement, we are allocated a

share of CoBank’s liquid assets. We are currently in compliance with the GFA and do not foresee

significant issues with obtaining funding or maintaining liquidity.

We plan to continue to fund lending operations primarily through the utilization of our borrowing

relationship with CoBank and retained earnings. CoBank’s primary source of funds is the ability to

issue Systemwide Debt Securities to investors through the Federal Farm Credit Bank Funding

Corporation. This access has traditionally provided a dependable source of competitively priced

debt that is critical for supporting our mission of providing credit to agriculture and rural America.

Although financial markets experienced significant volatility in the last few years, we were able to

obtain sufficient funding to meet the needs of our customers.

We have a secondary source of liquidity and funding through an uncommitted Federal Funds line

of credit with Wells Fargo. The amount available through this line is $75,000 and is intended to

provide liquidity for disaster recovery or other emergency situations. At December 31, 2012, no

balance was outstanding on this line of credit.

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

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

reasonable stability in net interest income over an intermediate planning horizon and to preserve a

relatively stable market value of equity over the long term. Mismatches and exposure in interest

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

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

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

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

products with a blend of equity and debt obligations.

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

earning assets and interest-bearing liabilities in defined time segments at December 31, 2012. The

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

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

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

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

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

market value.


Northwest FCS’ repricing gap as of December 31, 2012 is characterized as slightly asset sensitive.

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

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

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

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

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

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

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

Our interest rate risk management board policy establishes limits for changes in net interest

income and market value of equity sensitivities. These limits are measured and reviewed by the

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

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

and instantaneous shocks of interest rates up and down 2 percent. If the three-month Treasury bill

interest rate is less than 4 percent, then the downward shock is equal to 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 upward and downward shocks reflected in the above table are based on parallel and

instantaneous interest rate movements of 1 and 2 percent. Due to extremely low short-term

interest rates in 2012, the 1 and 2 percent parallel and instantaneous downward shock scenarios

cannot be obtained. The downward interest rate shock in the preceding table was near zero.

As of December 31, 2012, all interest rate risk-related measures were within Board policy limits,

general financing agreement requirements, and management guidelines.

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

financial viability and to provide for growth necessary to competitively meet the needs of our

customers. In assessing the amount of capital needed, we take into account credit risk, funding

and interest rate risks, contingent and off-balance sheet liabilities and other conditions warranting

additional capital. As part of our capitalization plan we evaluate the financial benefits and costs of

using credit default swaps and other transactions. These transactions protect us against credit

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

diminish over time.

For the year ended December 31, 2012, total members’ equity increased $127,371 or 8.9 percent

from December 31, 2011. The increase in members’ equity was primarily due to earnings of

$187,255 partially offset by patronage payable of $55,245 and an increase in accumulated other

comprehensive loss of $4,716.

As displayed in the following table, at December 31, 2012, 2011, and 2010, we exceeded the

minimum regulatory requirements, which are noted parenthetically:

Management is not aware of any reasons why our regulatory capital requirements would not be

met in 2013. See Note 8 to the Consolidated Financial Statements, Members’ Equity for further

discussions of these regulatory ratios.


Phil DiPofi

President and CEO

March 1, 2013

Tom Nakano

Executive VP-CFO

March 1, 2013

Kevin Riel

Chair of the Board

March 1, 2013

34 NORTHWEST FCS


REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders

of Northwest Farm Credit Services

In our opinion, the accompanying consolidated balance sheet and the related consolidated

statements of income, comprehensive income (loss), changes in members’ equity and 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, 2012, 2011 and 2010,

and the results of its operations and its cash flows for each of the three years in the period

ended December 31, 2012 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, 2012, based on

criteria established in Internal Control - Integrated Framework issued by the Committee of

Sponsoring Organizations 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 assertion of the effectiveness of

internal control over financial reporting, included in the Report on Internal Control over

Financial Reporting appearing in the Association’s 2012 Annual Report to Stockholders. Our

responsibility is to express opinions on these financial statements and on the Association’s

internal control over financial reporting based on our integrated audits. We conducted our

integrated audits in accordance with the auditing standards of the Public Company Accounting

Oversight Board (United States) and in accordance with the auditing and attestation

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

standards require that we plan and perform the audits 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 audits 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 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 audits also included performing such other

procedures as we considered necessary in the circumstances. We believe that our audits

provide a reasonable basis for our opinions.

An Association’s internal control over financial reporting is a process effected by those

charged with governance, management and other personnel, designed to provide reasonable

assurance regarding the preparation of reliable financial statements in accordance with

accounting principles generally accepted in the United States of America. An Association'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 Association; (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 Association are being made only in accordance with authorizations of

management and those charged with governance; and (iii) provide reasonable assurance

regarding prevention or timely detection and correction of unauthorized acquisition, use, or

disposition of the Association'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 and correct misstatements. Also, projections of any evaluation of effectiveness to

future periods are subject to the risk that controls may become inadequate because of

changes in conditions, or that the degree of compliance with the policies or procedures may

deteriorate.

March 1, 2013


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38 NORTHWEST FCS


40 NORTHWEST FCS


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

NOTE 1 > Organization and Operations

ORGANIZATION

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 referred to as Northwest FCS) is a member-

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

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

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 Congress

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

Act of 1971, as amended (the Farm Credit Act). At December 31, 2012, the System was comprised

of three Farm Credit Banks, one Agricultural Credit Bank, and 82 associations.

CoBank, ACB (the Bank), its related associations and AgVantis, Inc. (AgVantis) are collectively

referred to as the CoBank District. The Bank provides the funding to associations within the District

and is responsible for supervising certain activities of the District associations. AgVantis, which is

owned by the entities it serves, provides technology and other operational services to certain

associations and to CoBank. The CoBank District consists of the Bank, 27 Agricultural Credit

Associations (ACA), which each have two wholly owned subsidiaries, (an FLCA and a PCA), two

FLCAs and AgVantis.

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

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

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

purposes.

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

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

Farm Credit entities. At December 31, 2012, Northwest FCS’ owned approximately 15 percent of

FPI.

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

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

independent equipment dealers. The program is facilitated by a limited liability partnership in

which Northwest FCS is a partial owner. At December 31, 2012, Northwest FCS’ owned

approximately 10 percent of AgDirect.

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

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

Financial (ProPartners). ProPartners is directed by representatives from the participating

associations. The income, expense and loss sharing agreements are based on each association’s

participation interest in ProPartners’ loan volume, which is established according to a prescribed

formula which includes the risk funds of the associations. As of December 31, 2012, Northwest FCS

had a 25.75 percent participation interest in the alliance.

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

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

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

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

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

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

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

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

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

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

is required to pay premiums, which may be passed on to the associations, into the Insurance Fund

based on its annual average outstanding insured debt adjusted to reflect the reduced risk on loans

or investments guaranteed by federal or state governments until the assets in the Insurance Fund

reach the “secure base amount”, which is defined in the Farm Credit Act as 2 percent of the

aggregate Insured Debt or such other percentage of the aggregate obligations as the Insurance

Corporation, in its sole discretion, determines to be actuarially sound. When the 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 2 percent level. As required by the


Farm Credit Act, as amended, the Insurance Corporation may return excess funds above the

secure base amount to System institutions. The Bank passes this premium expense and the return

of excess funds as applicable through to each association based on the association’s average

adjusted note payable balance with the Bank.

OPERATIONS

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

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

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

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

products, rural residents, and farm-related businesses.

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

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

management services.

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

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

obtained at no charge by contacting the Marketing Department, P.O. Box 2515, Spokane,

Washington 99220-2515 or calling (509) 340-5300. Upon request, stockholders of Northwest FCS

will be provided with a copy of the CoBank Annual Report, which includes the combined balance

sheet and income statements of CoBank and its related associations, and AgVantis. The CoBank

Annual Report discusses the material aspects of the Bank’s and District’s financial condition,

changes in financial condition, and results of operations.

NOTE 2 > Summary of Significant Accounting Policies

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

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

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

make estimates and assumptions that affect the amounts reported in the consolidated financial

statements and accompanying notes. Actual results may differ from these estimates. Significant

estimates are discussed in the footnotes, as applicable.

Certain amounts in prior years’ financial statements have been reclassified to conform to current

financial statement presentation. The reclassifications include amounts referred to as advance

conditional payment balances which have been reclassified and shown as liabilities rather than

netted within loans. The related interest expense has also been reclassified out of interest income

for the periods presented. The reclassification did not impact the results of operations or changes

in members’ equity.

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

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

significant inter-company transactions have been eliminated in consolidation.

RECENTLY ISSUED OR ADOPTED ACCOUNTING PRONOUNCEMENTS

In December 2011, the Financial Accounting Standards Board (FASB) issued guidance entitled,

“Balance Sheet – Disclosures about Offsetting Assets and Liabilities.” The guidance requires an

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

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

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

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

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

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

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

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

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

interim periods within those annual periods. The adoption of this guidance will not impact

Northwest FCS’ financial condition or its results of operations, and will not result in additional

disclosures.

In June and December 2011, the FASB issued guidance entitled, “Comprehensive Income –

Presentation of Comprehensive Income.” This guidance is intended to increase the prominence of

other comprehensive income in financial statements. The main provisions of the guidance provides

that an entity that reports items of other comprehensive income has the option to present

comprehensive income in either one or two consecutive financial statements. The guidance did not

change the items that must be reported in other comprehensive income. With either approach, an

entity is required to present reclassification adjustments for items reclassified from other

comprehensive income to net income in the statement(s). The December 2011 guidance deferred

the effective date for the presentation of reclassification adjustments. This guidance is to be

applied retrospectively and is effective for fiscal years, and interim periods within those years,

beginning after December 15, 2011. The adoption of this guidance did not impact the financial

42 NORTHWEST FCS

condition or results of operations, but resulted in changes to the presentation of comprehensive

income.

SIGNIFICANT ACCOUNTING POLICIES

CASH

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

financial institutions.

INVESTMENT SECURITIES

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

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.

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

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

and accretion of discounts.

LOANS AND ALLOWANCE FOR CREDIT LOSSES

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

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

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

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

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

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

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

loan as an adjustment to yield.

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

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

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

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

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

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

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

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

is collected or otherwise discharged in full.

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

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

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

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

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

at the time they are determined to be uncollectible.

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

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

would not otherwise consider. Such concessions may include monetary concessions or other

modifications to the contractual terms of the loan. If the borrower’s ability to meet the revised

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

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

nonaccrual balance. A nonaccrual loan may, at times, be maintained on a cash basis. As a cash

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

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

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

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

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

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

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

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

contractual indebtedness of the borrower.

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

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

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

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

are sold following accounting requirements for sale treatment.

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

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

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

Probability of default is the probability that a borrower will experience a default within 12 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 in full or the borrower is past

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

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

next 12 months.

Each of the probability of default categories carries a distinct likelihood of default. The 14-point

scale provides for granularity of the probability of default, especially in the acceptable ratings.

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

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

reflect almost no default to a minimal default percentage. The probability of default 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. A substandard rating indicates that the probability of default

is high.

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

decreased through 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, including economic conditions, loan portfolio composition, collateral value, portfolio

quality, current production conditions, and prior loan loss experience. The allowance for loan

losses encompasses various judgments, evaluations and appraisals with respect to the loans and

their underlying security that, by their nature, contain elements of uncertainty, imprecision and

variability. Changes in the agricultural economy and environment and their impact on borrower

repayment capacity will cause various judgments, evaluations and appraisals to change over time.

Accordingly, actual circumstances could vary significantly from Northwest FCS’ expectations and

predictions of those circumstances. Management considers the following factors in determining

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

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

government assistance programs, regional economic effects and weather-related influences.

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

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

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

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

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

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

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

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

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

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

contingency.

INVESTMENT IN COBANK, ACB

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

required investment is 4 percent of the prior year’s average direct loan volume. The investment in

CoBank is composed of patronage based stock and purchased stock. Accounting for this

investment is on the cost plus allocated equities basis.

OTHER PROPERTY OWNED

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

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

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

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

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

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

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

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

Consolidated Statement of Income.

PREMISES AND EQUIPMENT

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

ADVANCED CONDITIONAL PAYMENTS

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

borrowers. During the year ended December 31, 2012, advance conditional payments were

reclassified and are included in advance conditional payments and other interest-bearing liabilities

on the accompanying Consolidated Balance Sheet. All periods presented reflect the reclassification.

Previously, the advance conditional payments were netted within the borrower’s related loan

balance and amounts in excess of the loan balance were reported within advance conditional

payments and other interest-bearing liabilities on the accompanying Consolidated Balance Sheet.

44 NORTHWEST FCS

Advanced conditional payments are not insured. Interest is paid by Northwest FCS on such

accounts.

EMPLOYEE BENEFIT PLANS

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

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

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

who elected to transfer and all new employees hired after December 31, 1994, participate in the

Defined Contribution Plan. The Pension Plan uses the “Entry Age Normal Cost” actuarial method for

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

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

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

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

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

contribution costs are expensed in the same period that participants earn employer contributions

and employer matching costs are expensed as funded.

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

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

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

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

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

programs are continued. Under the present plan, the monthly benefit is equal to the difference

between the participant’s actual monthly retirement benefit payment under the Pension Plan and

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

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

provision or government regulations subsequently issued, did not apply.

INCOME TAXES

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

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

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

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

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

service. All significant transactions between the subsidiaries and the parent company have been

eliminated in consolidation. The ACA, along with the PCA subsidiary, is subject to income taxes.

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

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

local laws.

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

subject to federal income tax and pay state income taxes in Montana and Oregon. Both entities

currently operate as cooperatives that qualify for tax treatment under Subchapter T of the Internal

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

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

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

qualified patronage refunds.

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

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

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

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

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

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

expected patronage program, which reduces taxable earnings.

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

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

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

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

earnings to Northwest FCS’ stockholders through qualified patronage allocations.

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

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

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

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

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

PATRONAGE DISTRIBUTIONS FROM COBANK, ACB

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

CoBank capital plan, the bank distributes patronage from Northwest FCS’ direct lending business in


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

percent cash and 25 percent Class A stock.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY

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

(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.

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

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

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

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

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

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

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

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

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

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

instrument, the related change in fair value is recorded in current period earnings.

Northwest FCS formally documents all relationships between hedging instruments and hedged

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

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

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

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

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

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

structure of Northwest FCS’ current derivative transactions, management has no reason to believe

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

be recorded in the manner described in Note 17 of these consolidated financial statements.

OTHER COMPREHENSIVE INCOME (LOSS)

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

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

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

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

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

of adjustments related to Northwest FCS’ defined benefit pension and to adjustments related to its

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

FAIR VALUE MEASUREMENTS

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

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

used to measure fair value:

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

has the ability to access at the measurement date. Level 1 assets include 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 fixed-income 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 correlation or other means. Pension

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

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

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

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

reporting entity’s own assumptions about factors 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,

46 NORTHWEST FCS

retained residual interests in securitizations, asset-backed securities, highly structured or long-term

derivative contracts, certain loans and other property owned. Pension plan assets that are

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

The fair value disclosures are presented in Note 11, Note 14, and Note 16.

OFF-BALANCE SHEET CREDIT EXPOSURES

Commitments to extend credit are agreements to lend to customers, generally having fixed

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

letters of credit are conditional commitments issued to guarantee the performance of a customer

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

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

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

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

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

of the customer’s creditworthiness.

NOTE 3 > Loans and Allowance for Loan Losses

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

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

for these various markets and commodities. A summary of loans follows:

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

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

information regarding participations purchased and sold as of December 31, 2012:

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

shown in the following table, which includes accrued interest:

While the amounts represent Northwest FCS' maximum potential credit risk as it relates to

recorded loan principal, a substantial portion of Northwest FCS' lending activities is collateralized

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

the current loss exposure is considered in the determination of the allowance for loan losses in the

consolidated financial statements.

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

management’s credit evaluation of the borrower. Collateral held varies but typically includes


farmland and income-producing property, such as crops and livestock, machinery and equipment

as well as inventories and receivables. Long-term real estate loans are secured by first liens on the

underlying real property. Federal regulations state that long-term real estate loans are not to

exceed 85 percent (97 percent if guaranteed by a government agency) of the property’s appraised

value. However, a decline in a property’s market value subsequent to loan origination or advances,

or other actions necessary to protect the financial interest of Northwest FCS in the collateral, may

result in loan-to-value ratios in excess of the regulatory maximum.

One credit quality indicator utilized by Northwest FCS is the FCA Uniform Loan Classification

System that categorizes loans into five categories. The categories are defined as follows: Acceptable – assets are expected to be fully collectible and represent the highest quality;

Other assets especially mentioned (OAEM) – assets are currently collectible but exhibit some

potential weakness;

Substandard – assets exhibit some serious weakness in repayment capacity, equity, and/or

collateral pledged on the loan;

Doubtful – assets exhibit similar weaknesses to substandard assets; however, doubtful assets

have additional weaknesses in existing factors, conditions and values that make collection in

full highly questionable, and;

Loss – assets are considered uncollectible.

The following table shows loans and related accrued interest classified under the FCA Uniform

Loan Classification System as a percentage of total loans and related accrued interest receivable by

loan type as of December 31:

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

according to the contractual terms.

The following table presents information relating to impaired loans including accrued interest,

where applicable:

48 NORTHWEST FCS

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

December 31, 2012, 2011, and 2010 totaled $8,447, $15,023, and $20,479, respectively.

Nonperforming assets consist of impaired loans and other property owned. The following table

presents these in a more detailed manner than the previous table. These nonperforming assets,

including related accrued interest where applicable, are as follows:

Additional impaired loan information, including related accrued interest where applicable, as of

December 31, 2012, 2011 and 2010 is as follows:


Interest income is recognized and cash payments are applied on nonaccrual impaired loans as

described in Note 2. The following table presents interest income recognized on impaired loans:

Interest income on nonaccrual and accruing restructured loans that would have been recognized

under the original terms of the loans were as follows:

The following tables provide an aging analysis of past due loans and accrued interest:

50 NORTHWEST FCS

Note: The recorded investment in the receivable is the face amount increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges, or acquisition costs and may also reflect a previous direct write-down of the investment.

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

legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it

would not otherwise consider.

The following table presents additional information regarding troubled debt restructurings that

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

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

During 2012, troubled debt restructurings that occurred within the previous 12 months and for

which there was a subsequent payment default during the period totaled $105, substantially all

were classified as real estate mortgages.

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

restructurings as of December 31 of the respective periods. These loans are included as impaired

loans in the impaired loans table.


Summaries of the changes in the allowance for loan losses and the ending balance of loans and accrued interest outstanding as of December 31, 2012, 2011 and 2010 are as follows:

52 NORTHWEST FCS

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

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

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

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

remained in place until the loans were paid in full, gave Northwest FCS the right to sell the loans

identified in the agreements to Farmer Mac after four months of delinquency. Loans and related

accrued interest sold to Farmer Mac at December 31, 2012 and 2011 were $0, and $200 as of

December 31, 2010, respectively. The balance of the loans under the long-term standby

commitments was $0 at December 31, 2012 and 2011, and $78,903 at December 31, 2010,

respectively. Fees for such commitments totaled $0, $864, and $415 for the years ended

December 31, 2012, 2011, and 2010, respectively. In December 2011, Northwest FCS and Farmer

Mac agreed to terminate the aforementioned agreement without further obligation by either party.

Northwest FCS paid Farmer Mac $550 as part of the termination agreement, which is included in

the 2011 fees mentioned above. There was no activity related to Farmer Mac in 2012.

During 2007, 2004, and 2002, Northwest FCS entered into credit default swaps with Mt. Spokane

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

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

place over the life of the loans under the swap agreement, and fees are paid accordingly based on

the volume of the loans under the agreements. At the establishment of each agreement,

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

amortized as of December 31, 2012. The following discussion provides the key provisions of each

of the agreements.

2007 LLC

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, no payment is due to Northwest FCS until Northwest FCS’ Retained

First Loss Notional Amount is reduced to zero. In addition to loss events, proportionate reductions

in the Retained First Loss Notional Amount will occur due to reductions of the Aggregate Notional

Amount of the Reference obligations associated with non-loss events such as repayment of loan

principal. As of December 31, 2012, the balance of the Retained First Loss Notional Amount was

$2,928 and the maximum amount of losses the 2007 LLC will be required to pay under the credit

default swap was $19,026. $233 of losses have been incurred by Northwest FCS.


2004 LLC

Pursuant to the credit default swap, following the occurrence of a known loss, the 2004 LLC will be

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

plus covered interest and costs less any recoveries. As of December 31, 2012, the maximum

amount of losses the 2004 LLC will be required to pay under the credit default swap was $14,103,

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

TRUST

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

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

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

were minimal. As of December 31, 2012, $26 of losses have been incurred by the Trust.

The following tables provide information related to loan balances, and fees and amortization

pertaining to the aforementioned credit default swap agreements:

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

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

Failure 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 obligations fully

guaranteed as to timely payment of principal and interest by, the United States of America,

obligations of the Federal National Mortgage Association, Federal Home Loan Mortgage

Corporation, Federal Home Loan Bank or obligations of any agency or instrumentality of the United

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

States of America.

Mt. Spokane 2007-A LLC is also a variable interest entity created by Lehman Brothers to acquire

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

payment of the LLC under a credit default swap with Northwest FCS. The bankruptcy of Lehman

Brothers in 2008 did not have an economic impact on the LLC. The securities are limited to direct

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

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

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

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

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

Treasury Regulations. Management has evaluated these variable interest entities and concluded

that they are not subject to consolidation.

NOTE 4 > Investment in CoBank, ACB

At December 31, 2012, Northwest FCS’ investment in CoBank is in the form of Class A stock with a

par value of $100 per share. Northwest FCS is required to own stock in CoBank to capitalize its

direct loan balance and participation loans sold to CoBank. The current requirement for capitalizing

its direct loan from CoBank is 4 percent of Northwest FCS’ prior year average direct loan balance.

The 2012 requirement for capitalizing its patronage-based participation loans sold to CoBank is 8

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

Under the current CoBank capital plan applicable to such participations sold, patronage from

CoBank related to these participations sold is paid 75 percent cash and 25 percent Class A stock.

The capital plan is evaluated annually by CoBank’s board and management and is subject to

change. Estimating the fair value of Northwest FCS’ investment in CoBank is not practicable

because the stock is not traded.

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

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

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

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

54 NORTHWEST FCS

NOTE 5 > Premises and Equipment

Premises and equipment consist of the following:

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

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

not depreciated.

Northwest FCS is obligated under various noncancellable operating leases. Certain office space and

equipment are leased. Rental expense under these noncancellable operating leases was $6,403,

$6,352, and $6,297 for the years ended December 31, 2012, 2011, and 2010, respectively. At

December 31, 2012, future minimum lease payments for all noncancellable leases are as follows:

NOTE 6 > Other Property Owned

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

NOTE 7 > Note Payable to CoBank, ACB

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

portfolio. This indebtedness is collateralized by a pledge of substantially all of Northwest FCS’

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

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

FCS from CoBank are subject to periodic renewals in the normal course of business. Each debt

obligation has its own term and rate structure. Northwest FCS was in compliance with the terms

and conditions of the GFA as of December 31, 2012. The weighted average interest rate for all

debt was 1.66, 1.94, and 2.08 percent at December 31, 2012, 2011, and 2010, respectively. The

GFA will expire on May 31, 2013 and management expects renewal of the GFA at that time.

Through the direct note to the bank, Northwest FCS is liable for the following:

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. Floating rate notes have maturities

ranging from 6 months to 10 years. The revolving line of credit is renewed annually and is priced

at the overnight funds rate.


The maturities of debt within the direct note to the Bank as of December 31, 2012 are shown

below:

At December 31, 2012, callable debt was $743,000, with a range of call dates between January

2013 and June 2015.

Under the Farm Credit Act, Northwest FCS is obligated to borrow only from CoBank, unless 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, 2012, Northwest FCS’

note payable is within the specified limitations.

Northwest FCS has a secondary source of liquidity and funding through an uncommitted Federal

Funds line of credit with Wells Fargo. The amount available through this line is $75,000 and is

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

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

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

on Industrial Revenue Bonds. This relationship has been discontinued.

NOTE 8 > Members’ Equity

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

capitalization requirements and restrictions, and equities are provided below.

CAPITAL STOCK AND PARTICIPATION CERTIFICATES

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

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

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

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

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

value of the stock was usually added to the principal amount of the related loan obligation. At the

time this change occurred, approximately $13,169 was transferred from loans to other assets on

the Consolidated Balance Sheet. Northwest FCS retains a first lien on common stock or

participation certificates owned by its borrowers.

Pursuant to provisions of the Farm Credit Act, the System’s minimum initial borrower investment

requirement is one thousand dollars or 2 percent of the related loan balance on a per customer

basis, whichever is less. The bylaws of Northwest FCS provide its Board of Directors with the

authority to modify the capitalization requirements for new loans subject to a maximum of 4

percent of the related loan balance.

Retirement of equities noted above will be at the lower of par or book value, and repayment of a

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

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

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

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

retirements of at-risk equities subsequent to such noncompliance would be prohibited, except for

retirements in the event of default or loan restructuring.

PROTECTED BORROWER STOCK

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

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

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

capital stock and participation certificates issued prior to October 6, 1988. As of December 31,

2012, Northwest FCS had no remaining protected borrower stock outstanding, as the last

remaining balance was retired during 2011.

REGULATORY CAPITALIZATION REQUIREMENTS AND RESTRICTIONS

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

percent of average risk-adjusted assets. Failure to meet this requirement can initiate certain

mandatory and possibly additional discretionary actions by the FCA that, if undertaken, could have

a direct material effect on Northwest FCS’ financial statements. Northwest FCS is prohibited from

reducing permanent capital by retiring stock or making certain other distributions to stockholders

unless prescribed capital standards are met. The FCA regulations also require additional minimum

standards for capital be maintained. These standards require all System institutions to achieve and

56 NORTHWEST FCS

maintain ratios of total surplus as a percentage of risk-adjusted assets of 7 percent and of core

surplus (generally unallocated retained earnings) as a percentage of risk-adjusted assets of 3.5

percent. Northwest FCS’ permanent capital, core surplus, and total surplus ratios at December 31,

2012, were 13.4 percent, 13.3 percent, and 13.3 percent, respectively. Management is not aware

of any reasons why Northwest FCS’ regulatory capital requirements would not be met in 2013, nor

is it currently prohibited from retiring stock or distributing earnings or expected to be in 2013.

An existing regulation empowers FCA to direct a transfer of funds or equities by one or more

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

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

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

DESCRIPTION OF EQUITIES

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

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

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

retired as of December 31, 2011.

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

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

its par value. At December 31, 2012, there were 2,555,101 shares outstanding with a total par

value of $12,775.

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

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

exceed its par value. At December 31, 2012, there were 84,173 units outstanding with a total par

value of $421.

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

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

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

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

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

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

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

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

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

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

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

would continue to be retired at par or face value.

PATRONAGE

Northwest FCS’ 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 FCS’ Board of Directors, consistent with the requirements of Subchapter T

of the Internal Revenue Code. For the years ending December 31, 2012, 2011, and 2010, the

Board approved cash patronage distributions of $55,245, $53,264, and $35,958, respectively.

Patronage distributions are recorded on an 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 2012, the Board of Directors of Northwest FCS

approved a resolution to distribute 2013 earnings in the form of patronage dividends to its

stockholders. The patronage dividend will be accrued in 2013 and declared and paid in 2014.

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

retained as unallocated retained earnings. At December 31, 2012, all accumulated earnings are

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

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

not distributed patronage refunds, are included in the unallocated retained earnings account. Such

allocations may provide a future basis for a distribution of capital. The Board of Directors considers

these unallocated retained earnings to be permanently invested in the Association. As such, there

is no current plan to revolve or redeem these amounts. No express or implied right to have such

capital retired or revolved at any time is granted.

OTHER ACCUMULATED COMPREHENSIVE INCOME (LOSS)

Northwest FCS reports accumulated other comprehensive income (loss) as a component of

members’ equity, which is reported net of taxes as follows:


NOTE 9 > Patronage Distributions from Farm Credit Institutions

Patronage income recognized from Farm Credit Institutions to Northwest FCS totals $42,028,

$39,883, and $38,962 for the years ended December 31, 2012, 2011, and 2010, respectively. Of

this amount $38,820, $38,077, and $37,454 for the years ended December 31, 2012, 2011, and

2010, respectively, was related to CoBank. Patronage distributed from CoBank was in cash and

stock. The amount declared in December 2012 was accrued and will be paid by CoBank in 2013. NOTE 10 > Income Taxes

The provision for income taxes follows:

The provision for (benefit from) 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:

The calculation of deferred tax assets and liabilities involves various management estimates and

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

patronage income retained. The expected future tax rates are based upon enacted tax laws.

Northwest FCS recorded a valuation allowance of $35,434, $25,139, and $22,908 during 2012,

2011, and 2010, respectively. Northwest FCS will continue to evaluate the realizability of the

deferred tax assets and adjust the valuation allowance accordingly.

Northwest FCS has unrecognized tax positions for which a liability has been established. A $1.0

million uncertain tax position was recorded in the year ended December 31, 2012 related to a state

tax position. A reconciliation of the beginning and ending amount of unrecognized tax benefits is

as follows:

The total amount of unrecognized tax positions that, if recognized would impact the effective tax

rate is $1,000. Northwest FCS does not have any positions for which it is reasonably possible that

the total amounts of unrecognized tax positions will significantly increase or decrease within the

next 12 months.

58 NORTHWEST FCS

Northwest FCS recognizes interest and penalties related to unrecognized tax positions as an

adjustment to income tax expense. The amount of interest recognized was $58 for the year ended

December 31, 2012.

Tax years that remain open for federal and state income tax jurisdictions are generally 2009 and

forward.

NOTE 11 > Employee Benefit Plans

Certain employees of Northwest FCS participate in a Pension Plan. The Department of Labor has

determined the plan to be a governmental plan; therefore, the plan is not subject to the provisions

of the Employee Retirement Income Security Act of 1974, as amended (ERISA). As the plan is not

subject to ERISA, the plan’s benefits are not insured by the Pension Benefit Guaranty Corporation.

Accordingly, the amount of accumulated benefits that participants would receive in the event of

the plan’s termination is contingent on the sufficiency of the plan’s net assets to provide benefits at

that time. While the plan is a governmental plan and is not subject to minimum funding

requirements, Northwest FCS contributes amounts necessary on an actuarial basis to provide the

plan with sufficient assets to meet the benefits to be paid to participants. The amounts ultimately

to be contributed and to be recognized as expense as well as the timing of those contributions and

expenses, are subject to many variables including performance of plan assets and interest rate

levels. These variables could result in actual contributions and expenses being greater than or less

than anticipated.

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

Northwest FCS also has a Restoration Plan that provides retirement benefits above the Internal

Revenue Code compensation limit for eligible individuals.

The Pension Plan was closed to new participants beginning January 1, 1995 and is

noncontributory. Benefits are based on salary and years of service. The following tables set forth

the obligations and funded status of Northwest FCS’ Pension Plan and Restoration Plan.

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

retirement benefit plans follows:


The projected benefit obligation, accumulated benefit obligation and the fair value of plan assets

for each of Northwest FCS’ employee benefit plans are presented in the following table. Each of

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

reported:

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

comprehensive income as of December 31 are as follows:

The estimated net loss and prior service cost for the Pension Plan and Restoration Plan that will be

amortized from accumulated other comprehensive income into net periodic benefit cost in 2013 is

$1,744 and $282, respectively.

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

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

December 31:

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

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

statements, without exposing the plan to undue risk. A Board of Trustees (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 adopt an asset allocation strategy for each plan that reflects return and

risk objectives, plan liabilities, and other factors.

The Trustees employ a total return investment approach whereby a mix of equities and fixed

income investments are used to maximize the long-term return of plan assets for a prudent level

of risk. The intent of this strategy is to minimize plan expenses by outperforming plan liabilities

over the long run. Risk tolerance is established through careful consideration of plan liabilities, plan

funded status, and the participating entities’ financial conditions. The investment portfolio contains

a diversified blend of equity and fixed income investments. Furthermore, equity investments are

diversified across U.S. and non-U.S. stocks as well as growth, value, small, mid, and large

capitalizations. Other investment strategies may be employed to gain certain market exposures,

reduce portfolio risk, and to further diversify portfolio assets. Investment risk is measured and

monitored on an ongoing basis through annual liability measurements, periodic asset/liability

studies, and monthly and quarterly investment portfolio reviews.

60 NORTHWEST FCS

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 asset allocation policy of the pension plan for 2013 is a target of

60 percent in equity securities, 35 percent in debt securities and 5 percent in real estate, which is

comparable to 2012.

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

Plan Sponsor Committee (Plan Sponsor Committee) with input from the Trust Committee. The Plan

Sponsor Committee is comprised of certain members of senior management and boards of

directors of the participating employers. Historical return information is utilized to establish a best-

estimate range for each asset class in which the plan is invested. The most appropriate rate is

selected from the best-estimate range, taking into consideration the duration of plan benefit

liabilities and plan sponsor investment policies.

The fair values of the Pension Plan assets at December 31, 2012 by asset category are as follows:

There were no significant transfers between Level 1 and Level 2 and Level 3 during the year.

Pension 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 would be

classified as Level 2. In addition, assets measured at Net Asset Value (NAV) per share and may be

redeemed at NAV per share at the measurement date are classified as Level 2.

Unobservable inputs (e.g. a company’s own assumptions and data) and assets measured at NAV

per share which may not be redeemed at NAV per share at the measurement date would be

classified as Level 3. All assets are evaluated at the fund level.

The following benefit payments, which reflect expected future service, as appropriate, are

expected to be paid:


Northwest FCS is expected to contribute $273 to its Restoration Plan in 2013. No contributions are

expected to be made to the Pension Plan. As of December 31, 2012 the Restoration Plan had the

following:

Employees who do not participate in the Pension Plan participate in the Defined Contribution Plan,

which is in accordance with Section 401 of the Internal Revenue Code. The plan requires the

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

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

excess of the employee social security wage base is available. Defined Contribution Plan expense

recorded by Northwest FCS was $1,546, $1,486, and $1,325 in 2012, 2011, and 2010,

respectively.

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

rules. For employees participating in the Pension Plan, Northwest FCS matches 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 in the Defined Contribution

Plan, Northwest FCS matches employee contributions up to a maximum of 100 percent on the

employees’ first 6 percent of salary. Employer matching contributions were $2,297, $2,182, and

$2,399 for the years ended December 31, 2012, 2011, and 2010, respectively.

The senior officer compensation package, as administered by the Board Compensation Committee,

included a long-term incentive and retention program designed to retain senior management and

incent them for achieving certain specified personal and corporate goals through 2011. Northwest

FCS had established a Rabbi Trust for this plan and therefore accrued for the estimated liability

and also recorded an asset for contributions to cover estimated costs. During the year ended

December 31, 2012, the Board Compensation Committee approved a new long-term incentive plan

(LTIP) for senior management which began in 2012. The LTIP was only available to senior

management and included a single year plan for 2012 and a multi-year plan beginning in 2012. On

a go-forward basis this plan will be based on multiple years of corporate key results as compared

to the Board approved Business Plan.

NOTE 12 > Related Party Transactions

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

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

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

made on the same terms, including interest rates, amortization schedules and collateral, as those

prevailing at the time for comparable transactions with unrelated borrowers. Senior officers and

their immediate families are precluded from obtaining loans from Northwest FCS.

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

In the opinion of management, none of these loans outstanding at December 31, 2012 involved

more than a normal risk of collectability.

Northwest FCS also recognized $38,820, $38,077, and $37,454 of patronage distributions from

CoBank for the years ended December 31, 2012, 2011, and 2010, respectively. Northwest FCS

owned approximately 12.2 percent of the outstanding common stock of CoBank at December 31,

2012.

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

also sells loan participations to CoBank. At December 31, 2012, Northwest FCS had sold

participation interests to CoBank totaling $887,628 and had purchased loan participation interests

from CoBank totaling $717,980.

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

four participated loans. As of December 31, 2012, there was one remaining loan with an

outstanding principal balance of $5,135. No additional commitments were available for this loan at

December 31, 2012. Pursuant to the terms of the transaction, Northwest FCS guaranteed

62 NORTHWEST FCS

collection of 20 percent of the outstanding balance of the loans over their respective remaining

terms.

The investment in FPI was $1,465 as of December 31, 2012, which was included in Other Assets

on the Consolidated Balance Sheet.

As of December 31, 2012, Northwest FCS’ investment in AgDirect was $13,428, which was

included in Other Assets on the Consolidated Balance Sheet.

As of December 31, 2012, Northwest FCS had a 25.75 percent participation interest in ProPartners,

resulting in $45,839 included in Loans on the Consolidated Balance Sheet.

NOTE 13 > Regulatory Enforcement Matters

No FCA regulatory enforcement actions currently exist with respect to Northwest FCS.

NOTE 14 > 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, Summary of Significant

Accounting Policies for additional information.

Assets and liabilities measured at fair value on a recurring basis at December 31, 2012, 2011, and

2010, for each of the fair value hierarchy values are summarized in the following tables:

The table below represents reconciliations of all Level 3 liabilities measured at fair value on a

recurring basis for the years ended December 31, 2012, 2011, and 2010.


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

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2012, 2011,

and 2010 for each of the fair value hierarchy values are summarized in the following table:

VALUATION TECHNIQUES

As more fully discussed in Note 2, Summary of Significant Accounting Policies, accounting guidance

establishes a fair value hierarchy, which requires an entity to maximize the use of observable

inputs and minimize the use of unobservable inputs when measuring fair value. The following

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

liabilities.

ASSETS HELD IN NON-QUALIFIED TRUSTS

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

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

quoted net asset values that are observable in the marketplace.

DERIVATIVES

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

valuation hierarchy. However, few classes of derivative contracts are listed on an exchange; thus,

the derivative positions are valued using internally developed models that use as their basis readily

observable market parameters and are classified within Level 2 of the valuation hierarchy. Such

derivatives include interest rate and foreign currency cash flow hedges.

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.

STANDBY LETTERS OF CREDIT

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

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

settle similar obligations.

LOANS

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

based upon the underlying collateral since the loans are collateral-dependent loans for which real

estate is the collateral. The fair value measurement process uses appraisals and other 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.

OTHER PROPERTY OWNED

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

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

component of the asset’s fair value. As a result, these fair value measurements fall within Level 3

of the hierarchy.

NOTE 15 > Commitments and Contingencies

Northwest FCS has various commitments outstanding and contingent liabilities.

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

financing needs of its customers and to manage their exposure to interest-rate risk. These financial

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

64 NORTHWEST FCS

instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized

in the financial statements. Commitments to extend credit are agreements to lend to a customer

as long as there is not a violation of any condition established in the contract. Commercial letters

of credit are agreements to pay a beneficiary under conditions specified in the letter of credit.

Commitments and letters of credit generally have fixed expiration dates or other termination

clauses and may require payment of a fee. At December 31, 2012, $3,700,905 of commitments to

extend credit and $19,052 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 credit-related

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 credit risk amounts

are equal to the contract amounts, assuming that borrowers fail completely to meet their

obligations and the collateral or other security is of no value. The amount of collateral obtained, if

deemed necessary upon extension of credit, is based on management’s credit evaluation of the

borrower.

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 Consolidated

Balance Sheet of Northwest FCS. At December 31, 2012, $70,281 of standby letters of credit were

outstanding. The standby letters of credit typically have expiration dates of one year or less.

Northwest FCS maintains a contingency reserve for unfunded commitments, which reflects our

best estimate of losses inherent in lending commitments made to customers but not yet disbursed

upon. The reserve totaled $12,000 at December 31, 2012 and 2011, and $7,000 at December 31,

2010.

During 2012 and 2011, Northwest FCS recorded a contingent liability of $1,000 and $2,000,

respectively, related to a revenue tax. Northwest FCS has been in contact with the taxing

authority and has initiated managed audit proceedings to obtain a resolution and determine any

amounts potentially owed for periods open within the statute of limitations.

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.

NOTE 16 > Disclosures about Fair Value of Financial Instruments

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.

The next table presents the carrying amounts and estimated fair values of Northwest FCS’ financial

instruments at December 31, 2012, 2011, and 2010:

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:

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 origination rates as well as


management estimates of credit risk, management has no basis to determine whether the

estimated fair values presented would be indicative of the assumptions and adjustments that a

purchaser of the loans would seek in an actual sale, which could be less.

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

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.

ALLOWANCE FOR LOAN LOSSES

As discussed in Note 2, the allowance for loan losses represents an estimate of the credit risk in

Northwest FCS' loan portfolio. Because the discount rate used to adjust the carrying value of each

loan pool to its fair value reflects the credit risk in the loan portfolio, the allowance for loan losses

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

ASSETS HELD IN NON-QUALIFIED BENEFITS TRUSTS

These assets relate to deferred compensation and supplemental retirement plans. As discussed in

Note 14, the fair value of these assets is quoted net asset values.

NOTE PAYABLE TO COBANK, ACB

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 market

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

relationship between Systemwide bonds and notes and comparable U.S. Treasury notes.

DERIVATIVE ASSETS AND LIABILITIES

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

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

the Bank based on internal market valuation models.

STANDBY LETTERS OF CREDIT

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

agreements.

NOTE 17 > Derivative Instruments and Hedging Activities

Northwest FCS maintains an overall risk management strategy that incorporates the use of

derivative financial instruments to minimize significant unplanned fluctuations in earnings that are

caused by interest rate volatility. Our goal is to manage interest rate sensitivity by modifying the

repricing or maturity characteristics of certain balance sheet assets and liabilities. Northwest FCS

also maintains a foreign exchange risk management strategy to reduce the impact of foreign

currency fluctuations on our foreign currency denominated loan assets. As a result of interest rate

and foreign exchange rate fluctuations, fixed rate assets and liabilities will appreciate or depreciate

in market value. The effect of this variability in earnings is expected to be substantially offset by

gains and losses on the derivative instruments that are linked to these assets and liabilities.

Northwest FCS considers the strategic use of derivatives to be a prudent method of managing

interest rate and foreign exchange risk, as it prevents earnings from being exposed to undue risk

posed by changes in interest rates or foreign exchange rates.

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

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

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

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

therefore assumes no performance risk. Northwest FCS’ derivative activities are monitored by its

ALCO as part of the Committee’s oversight of the Association’s asset/liability and treasury

functions. The Committee is responsible for approving hedging strategies that are developed within

parameters established by Northwest FCS’ Board of Directors. The resulting hedging strategies are

then incorporated into Northwest FCS’ overall risk-management strategies.

66 NORTHWEST FCS

Northwest FCS has purchased an interest rate cap from CoBank to hedge the potential impact of

rising interest rates on our floating-rate debt. If the strike rate of the purchased interest rate cap is

exceeded, Northwest FCS will receive cash flows on the derivative to hedge our floating-rate

funding exposure above such strike levels. The interest rate cap is accounted for as a cash-flow

hedge. The cap has a notional amount of $73 million, and was purchased at a trade-date fair value

of $1,500. As of December 31, 2012, the cap fair value was $129 and the corresponding loss of

$1,371 was recorded to accumulated other comprehensive loss. As of December 31, 2011, the cap

fair value was $477 and the corresponding loss of $1,023 was recorded to accumulated other

comprehensive loss. At December 31, 2010, the cap fair value was $1,996 and the corresponding

gain of $496 was recorded to accumulated other comprehensive loss.

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

foreign currency denominated loans. The specific terms and amounts of the forwards are

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

foreign exchange forward sale as it arises. As of December 31, 2012, Northwest FCS recorded a

derivative liability of $37 for its executed foreign currency forward contracts, with the

corresponding offset to accumulated other comprehensive loss adjusted in accordance with

accounting guidance on foreign currency translation. The fair value at December 31, 2011, was a

derivative liability of $293 with a corresponding offset to accumulated other comprehensive loss

adjusted in accordance with accounting guidance on foreign currency translation. The fair value at

December 31, 2010, was a derivative liability of $313 with a corresponding offset to accumulated

other comprehensive loss adjusted in accordance with accounting guidance on foreign currency

translation.

NOTE 18 > Quarterly Financial Information (Unaudited)

Quarterly results of operations for the years ended December 31, 2012, 2011, and 2010 follow:

Northwest FCS’ 2012 Quarterly Reports to Stockholders are available free of charge by contacting

Northwest Farm Credit Services, ACA, P.O. Box 2515, Spokane Washington 99220-2515 or

contacting by telephone at (509) 340-5300 or toll free (800) 743-2125 . Northwest FCS’ 2012

Quarterly Reports to Stockholders are also available free of charge at any office location or at

www.northwestfcs.com. The 2013 Quarterly Reports to Stockholders will be available on

approximately May 15, 2013, August 14, 2013, and November 14, 2013. The Northwest FCS 2013

Annual Report will be posted on www.northwestfcs.com by March 14, 2014.

NOTE 19 > Subsequent Event

Northwest FCS has evaluated subsequent events through March 1, 2013, which is the date the

financial statements were issued or available to be issued.



DISCLOSURE INFORMATION REQUIRED BY FARM CREDIT ADMINISTRATION REGULATIONS (UNAUDITED) DESCRIPTION OF BUSINESS

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

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

in this annual report.

DESCRIPTION OF PROPERTY

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.

LEGAL PROCEEDINGS

Information regarding legal proceedings is incorporated herein by reference to Note 15 of the


DESCRIPTION OF CAPITAL STRUCTURE

Information regarding capital structure is incorporated herein by reference to Note 8 of the


DESCRIPTION OF LIABILITIES

Information regarding liabilities is incorporated herein by reference to Notes 5, 7, 10, 11, 15, and

16 of the financial statements included in this annual report.

SELECTED FINANCIAL DATA

“Five Year Summary of Selected Financial Data” included in this annual report is incorporated

herein by reference.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Management’s Discussion and Analysis included in this annual report is incorporated herein by

reference.

BOARD OF DIRECTORS

Corporate Governance

The Board of Directors of 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 elected by the Board. Two of

these board-elected 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 independence and

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 board-elected director position is a stockholder and is intended to help assure representation

of market segments not currently represented by a stockholder-elected director position or to bring

desired skills or background to the Board.

Northwest FCS’ Board has a comprehensive director training and development program in place.

This training consists of an annual board self-assessment of its governance practices as well as a

comprehensive new director orientation program. This program is intended to develop an

understanding of the roles and responsibilities of a director as well as to familiarize newer Board

members with key areas of financial performance, reporting and board oversight. This training

commitment involves an expectation of attendance by all directors at both Farm Credit System and

non-System meetings, seminars, and conferences as well as completion of a comprehensive board

training and leadership program during their term of service. This balance of training assures not

only an understanding of the Farm Credit System, but also exposes Board members to best

practices of other financial and lending institutions and allows them to benchmark Northwest FCS’

operations against those of other successful lending institutions.

The Board is independent of management. The CEO and Internal Audit report to the Board and no

management or employees may serve as directors. The Board generally has six regularly

scheduled meetings each year, plus interim conference calls as needed between meetings. One of

68 NORTHWEST FCS

those regularly scheduled meetings is conducted as a comprehensive three-day strategic planning

session. The Board currently operates with a structure of five committees – Governance, Audit,

Compensation, Risk and Strategy. These committees are structured to provide focus and expertise

in key areas of board oversight and to enhance the overall efficiency of scheduled Board meetings.

All policies, substantial contracts, and other major initiatives are generally reviewed by one of

these committees, with any actions recommended to the full Board for approval. Each committee

approves an operating statement outlining the purpose of the committee, its duties,

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

full Board acting on committee recommendations. These operating statements are reviewed and

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

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

of the Board’s oversight of these areas. These committees generally meet as part of regularly

scheduled Board meetings and also conduct conference calls as needed to carry out their

responsibilities between those regular meetings. The following are full descriptions of those

committees:

Governance Committee

This committee is made up of the Chair and Vice Chair of the Board as well as the Chair of the

Compensation, Audit, Risk, and Strategy Committees. In years where a new Board Chair is elected,

the prior year’s Board Chair also serves on this committee. The Governance Committee has the

authority to review, prioritize, and recommend agenda items for Board meetings and is responsible

for all Board policies not assigned to other committees. Committee duties also include serving as

an ad hoc committee on major System and organizational issues as well as legislative and

regulatory affairs, including monitoring Northwest FCS’ lobbying activities. This committee also

oversees the director nomination and Board election processes, director training, Standards of

Conduct, and serves as a Search Committee for appointed director positions and CEO transition, if

needed.

Audit Committee

This committee is made up of at least four Board members, including at least one appointed

Outside Director. All members of the committee are expected to have practical knowledge of

finance and accounting, be able to read and have a working understanding of the financial

statements, or develop that understanding within a reasonable period of time after being

appointed to the committee. The director designated as the “financial expert” serves as the chair

of this committee. Outside Director Christy Burmeister-Smith currently serves in this position. The

Board of Directors has determined that Ms. Burmeister-Smith has the qualifications and experience

necessary to serve as an audit committee “financial expert,” as defined by FCA regulation, and she

has been designated as such. Outside Director Julie Shiflett also qualifies as a financial expert and

is a designated alternate to serve in Ms. Burmeister-Smith’s absence.

Audit Committee members are appointed by the Board. The Audit Committee has unrestricted

access to representatives of the Internal Audit department, independent public accountants, and

Finance Division. Internal Audit reports directly to this committee.

This committee assists the Board in fulfilling its oversight responsibility related to accounting

policies, internal controls, financial reporting practices, and regulatory requirements. This

committee has an operating statement detailing its purpose and key objectives, authority,

composition, meeting requirements, and responsibilities. The operating statement, among other

things, gives the committee the authority to hire and compensate the external auditor, approve all

audit and permitted non-audit services, review the audited financial statements and all public

financial disclosures, meet privately with internal and external auditors, and review any complaints

regarding accounting irregularities and fraud. The operating statement is posted on Northwest FCS’

website www.northwestfcs.com.

Compensation Committee

This committee consists of the Board Chair and Vice Chair, at least one Outside Director, and three

to four other Board members selected by the Board Chair and the Outside Director. Neither the

CEO nor any member of management can be involved in the selection of committee members nor

can they participate in any deliberations of the committee on matters relating to their own

compensation.

The committee is responsible for reviewing and recommending for full Board approval the

performance goals for the CEO and the evaluation of the CEO’s performance against those goals.

It also recommends to the Board all actions necessary to administer the CEO’s base salary and any

short-term or long-term incentive awards under the terms of the CEO’s compensation plan. This

committee is also responsible for recommending to the Board the terms of the Senior Officers’

compensation plan and participation of Senior Officers in that plan. The Board has delegated to the

CEO the responsibility to administer the base salaries of those Senior Officers within Board

approved guidelines. However, the CEO must review the base salary administration with the

Compensation Committee before it becomes effective. The committee also reviews and


recommends for Board approval any short- or long-term incentives to be awarded to Senior

Officers under the terms of their compensation plan. The committee is also responsible for director

compensation and for oversight of Northwest FCS’ employee salary structure, benefit plans, all

Board policies applicable to those plans and other human resource matters not specifically

assigned to other committees.

Risk Committee

This committee provides oversight for the majority of the enterprise risk management practices of

the association. This committee reviews credit portfolio policies and management reports that

monitor compliance with these policies. It also acts on behalf of the Board on certain delegated

credit related matters. The committee reviews and recommends to the full Board for approval

underwriting standards and portfolio and lending limit policies, which guide all of Northwest FCS’

lending and credit related activities. In addition to monitoring the overall credit characteristics of

the industries Northwest FCS serves and the existing portfolio, the committee also reviews and

recommends to the full Board for approval, certain credit related actions that exceed

management’s delegated authority. This committee also oversees key risk areas associated with

budget, operations, technology, funding, interest rate, liquidity, capital management as well as

those risks associated with its alliance partners and counterparties.

Strategy Committee

This committee provides oversight in developing and monitoring the association’s strategic and

business plans in accordance with Northwest FCS’ mission, policies and procedures. It is

responsible to ensure board planning sessions and the association’s overall strategic planning

processes serve as foundations for the Business Plan. This specifically includes evaluating potential

benefits, costs, risks and strategies for considering opportunities such as emerging technologies,

product development, joint ventures, strategic alliances and mergers and acquisitions. The

committee oversees marketing, advertising and contribution activity. It provides oversight of the

Local Advisor program, Crop Insurance, Business Management Center and Knowledge Center. The

committee also evaluates management’s assessment of the association’s internal strengths and

weaknesses and external factors such as economic, competitor and political trends. The

committee’s authority is generally limited to investigation, development of proposed positions, and

making recommendations to the full Board for approval when appropriate.

Northwest FCS Directors

The following represents information regarding the directors of Northwest FCS, including their

principle occupations, business experience and any business in which they serve on the board of

directors or as a senior officer. Unless otherwise noted, the principle occupation, business

experience and employment of the directors over at least the past five years, is related to their

farming, ranching or aquatics operations described below.

Rick Barnes – Callahan, California

Elected in 2010; term expires 2015

Principal Occupation/Experience: Owner/Operator, Limerock Ranch, a cow-calf operation with

some timber. Also produces grass hay for the horse market.

Other Affiliations: Director, Siskiyou Resource Conservation District

Christy Burmeister-Smith – Newman Lake, Washington

Board-Elected Outside Director


Principal Occupation/Experience: Vice President-Controller and Principal Accounting Officer at

Avista Corporation, a provider of utility services. Serves as the designated “financial expert’ on the

Northwest FCS Board.

Other Affiliations: Director, Avista Foundations, a community investment program providing

funding to non-profit organizations; Director, YWCA of Spokane, social services provider

Drew Eggers – Meridian, Idaho


Principal Occupation/Experience: Owner/operator, Drew Eggers Farms. Raises peppermint,

spearmint, winter wheat and silage corn.

Other Affiliations: Chairman, Leadership Idaho Agriculture Foundation

Jim Farmer – Nyssa, Oregon


Principal Occupation/Experience: Part owner/Board member and Secretary/Treasurer,

Deseret Farms, a row crop farming operation. Serves as President/Board member, Fort Boise

Produce, a fresh onion packing and marketing operation.

Other Affiliations: Secretary/Treasurer, Nyssa Rural Fire Protection District

70 NORTHWEST FCS

Mark Gehring – Salem, Oregon


Principal Occupation/Experience: Owner/operator, Gehring Farms; Managing Member, Gibson

Creek Farms, LLC. Raises marionberries, blackberries, radish seed, wheat and turf grass seed.

Other Affiliations: Mr. Gehring’s interests in RainSweet/RS Growers, Inc., a Salem, Oregon fruit

and vegetable processor, were sold to family members in 2012. Prior Board Chair, RainSweet/RS

Growers.

David Hedlin – Mt. Vernon, Washington


Principal Occupation/Experience: Owner, R C Koudal Land Co. Raises vegetable seed, pickling

cucumbers, pumpkins and wheat.

Other Affiliations: Board Member, Northwest Ag Research Foundation, Skagitonians to Preserve

Farmland, and Skagit Valley Culinary Arts; Commissioner, Skagit County Dike District #9.

John Helle - Dillon, Montana


Principal Occupation/Experience: Owner, Helle Livestock, a commercial and purebred sheep

operation. Runs cow/calf pairs and farms small grains and hay.

Other Affiliations: None

Herb Karst – Sunburst, Montana


Principal Occupation/Experience: President, Karag, Inc., a family-held corporation producing

wheat, malting barley and other crops on a 4,300 acre farm in the joint venture 1927 Homestead.

Barley production consultant with Heineken International.

Other Affiliations: Board Member, The Farm Credit Council, a Farm Credit System trade

association handling legislative and regulatory matters.

Ed Malesich – Dillon, Montana

Elected in 1999; term expired 2012. Due to term limits, Mr. Malesich could not run for re-election.

He served as a director until his replacement was seated in March 2012.

Principal Occupation/Experience: Owner/President, Malesich Ranch Co.; Secretary/Treasurer,

Stone Creek Ranch. Commercial cow-calf operation, raises wheat, malt barley, and alfalfa hay.

Other Affiliations: Vice Chairman, Rocky Mountain Supply, a southwest Montana supply

cooperative; Director, CHS, Inc.

Bruce Nelson – Spokane, Washington


Principal Occupation/Experience: Owner, Nelson Farms, Inc., Silver Creek Farms, Inc., and

Twin Buttes Farms, Inc., raising several varieties of wheat, peas, lentils, barley and nursery trees.

Other Affiliations: Director, Washington’s Nature Conservancy Board; Ag Advisory Board

Member for Congresswoman Cathy McMorris Rodgers

Dave Nisbet – Bay Center, Washington

Board-elected stockholder director


Principal Occupation/Experience: Owner, Nisbet Oyster Co., Inc.; President and CEO, Goose

Point Oysters, Inc., and Hawaiian Shellfish, LLC, growing Pacific oysters and shellfish processing

plant.

Other Affiliations: Director, Pacific Shellfish Institute; Advisory Board Member, Oregon State

University Coastal Oregon Marine Experiment Station (COMES); Executive Board Member, OSU

Seafood Consumer Center.

Kevin Riel – Yakima, Washington


Principal Occupation/Experience: President, Double R Hop Ranches, Inc., President, Trigen

Enterprises, Inc., Managing Partner, WLJ Investments LLC, and 4K Investments, LLC. Raises hops,

apples and Concord grapes.

Other Affiliations: Director, Hop Growers of America

Karen Schott – Broadview, Montana


Principal Occupation/Experience: Owner/Secretary, Bar Four F Ranch, Inc. Raises winter

wheat, spring wheat, peas, and lease pasture operation.

Other Affiliations: Advisory Board Member, Southern Montana Experiment Station; President,

Broadview Community Center Board


Julie Shiflett – Spokane, Washington

Board-Elected Outside Director


Principal Occupation/Experience: Executive Vice President and Chief Financial Officer, Red

Lion Hotels; founding partner of Northwest CFO, which assists emerging and mid-market

companies to increase cash flow, profitability, sales, and company value; past CFO for Signature

Genomic Laboratories and Columbia Paint and Coatings. Serves as the alternate to the designated

“financial expert” on Northwest FCS’ Board.

Other Affiliations: Chair, Deaconess Medical Center Board of Trustees; Director and Audit

Committee Chair, American Chemet Corporation, a powder based chemicals manufacturer.

Shawn Walters – Newdale, Idaho


Principal Occupation/Experience: Owner, Shawn Walters Farms, Inc.; Co-Owner, Walters

Produce, Inc.; Partner in Walters & Walters, Aristocrat Farms, Idaho Grain Producers, Walters

Osgood Farms, and Walters Family Limited Partnership. Operates a fresh pack potato facility,

grows potatoes, wheat, barley and alfalfa.

Other Affiliations: Director, Enterprise Canal; Director, Idaho Business Council

COMPENSATION OF DIRECTORS

Director compensation is under the oversight of the Board’s Compensation Committee. The

committee conducts periodic director compensation studies to identify current compensation paid

to directors of Farm Credit and other similar entities. Based upon these studies, the compensation

committee recommends for approval adjustments to director compensation including any pay

differentials paid to the 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

FCA. Increases to director compensation typically become effective May 1 of each year.

Director compensation in 2012 was set at a rate of $48,798 per year for all directors. The Board

Chair and Chairs of both the Audit and Compensation Committees are paid $53,678. This

represents an additional 10 percent, and reflects their unique responsibilities and significant

additional time demands of these three positions. Director compensation paid annually to all

directors was increased effective May 2012 by $1,493 ($1,648 in the case of the Chair of the Board

and the Chairs of the Audit and Compensation Committees). Each director receives a monthly

retainer of $4,067 and the Board Chair and Chairs of the Audit and Compensation Committees

receive a monthly retainer of $4,473. No additional per diem is paid for attendance at Northwest

FCS meetings or functions. If a director is not able to attend a regular monthly board meeting,

then the director only receives the monthly retainer if attendance at or performance of other

official business during that month warrant that payment. In addition, Northwest FCS purchases an

Accidental Death and Disability policy for each director.

Directors and Senior Officers are reimbursed for reasonable travel expenses and related expenses

while conducting association business. In addition, directors are allowed reimbursement for

expenses related to their spouse attending the Annual Stockholder and Local Advisors Meeting,

summer planning session, the December Board meeting and one national meeting each year.

Directors’ spouse travel expenses may also be reimbursed for the legislative fly-in- if the spouse

participates in Congressional visits. In all other cases, spouse expenses are reimbursed only if

attendance at a meeting is preapproved by the Board. The aggregate amount of expenses

reimbursed to directors in 2012 was $106,789 compared to $137,382 in 2011 and $156,691 in

2010. The Director Compensation policy is available and will be disclosed to stockholders upon

request.

Information for each director for the year ended December 31, 2012, is as follows:

72 NORTHWEST FCS

SENIOR OFFICERS

Listed below is the CEO and eight Senior Officers of Northwest FCS who served during 2012. These

Senior Officers reported to the CEO and were on the Management Executive Committee (MEC) of

Northwest FCS. Information is provided on the experience of these Senior Officers, as well as on

any business for which they serve on the board of directors or act as a senior officer and the

primary business of that organization.

Phil DiPofi, President and CEO

Mr. DiPofi has served as President and CEO since January 1, 2011. Prior to that, he held various

senior officer positions with CoBank. Mr. DiPofi currently serves on the Board of Financial Partners,

Inc. (FPI) which provides technology support for Farm Credit institutions, including Northwest FCS.

He also serves on the board of Second Harvest Food Bank in Spokane, Washington. Second

Harvest leads a network of 250 neighborhood food banks and meal centers throughout Eastern

Washington and North Idaho.

Jim Allen, Senior Vice President-Capital Markets

Mr. Allen has served as Senior Vice President-Capital Markets since the unit’s inception in 1995. He

served on the MEC in early 2011 during the management transition and was then re-appointed in

July 2011, serving the remainder of the year. Prior to that, he held various positions for Northwest

FCS since being hired in 1978.

Fred DePell, Executive Vice President-Financial Services

Mr. DePell has served as Executive Vice President-Financial Services since 1992. Prior to that, he

held various positions for Northwest FCS since being hired in 1978. Mr. DePell serves on the board

of directors of the YMCA of the Inland Northwest (YMCA) headquartered in Spokane, Washington.

The YMCA is part of the largest not-for-profit community service organizations in America, working

to meet the health and social service needs of men, women and children.

Brent Fetsch, Senior Vice President-Chief Strategy Officer and Chief Information

Officer

Mr. Fetsch has served as Senior Vice President-Chief Strategy Officer and Chief Information Officer

since January 2011. Prior to that, he was Senior Vice President-Community Lending and also held

various positions for Northwest FCS since being hired in 1987.

Stacy Lavin, General Counsel

Mr. Lavin has served as General Counsel since May 2011. Prior to that, he was Assistant General

Counsel. Mr. Lavin has worked for Northwest FCS since 2001.

Tom Nakano, Executive Vice President-Chief Financial Officer

Mr. Nakano has served as Executive Vice President-Chief Financial Officer since October 2004.

Prior to that he was Vice President-Loan Accounting and Operations and held various positions for

Northwest FCS since being hired in 1993. 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

Farm Credit employers. He also serves as a board member of the Oregon State University Alumni

Association which engages alumni and friends to promote the advancement of the university and

build alumni membership, programs and value-added services.

Mark Nonnenmacher, Executive Vice President-Agribusiness

Mr. Nonnenmacher has served as Executive Vice President-Agribusiness since April, 2012. Mr.

Nonnenmacher has over 24 years of experience in the Farm Credit System, most recently at

CoBank managing the agribusiness lending operations of their Western Region.

Kathy Payne, Executive Vice President-Human Resources and Corporate

Administration

Ms. Payne has served as Executive Vice President-Human Resources and Corporate Administration

since July 2011. Prior to that she served as Executive Vice President-Human Resources and

Marketing, in a lead position in the Human Resources department since 1992 and in various other

positions since being hired in 1988. Ms. Payne serves on the board of directors of the Farm Credit

Foundations Consolidated Plan Sponsor Committee which oversees the plan design and non-

fiduciary responsibilities associated with the benefit plans offered by a number of Farm Credit

employers.

John Phelan, Executive Vice President-Chief Risk Officer

Mr. Phelan has served as Executive Vice President and Chief Risk Officer since January 2011. Prior

to that, he was Senior Vice President-Commercial Lending and held various positions with

Northwest FCS since being hired in 1992.


COMPENSATION OF CEO AND SENIOR OFFICERS

Executive Compensation - Summary

Our compensation program for the CEO and Senior Officers of Northwest FCS is designed to

reward management for performance that builds long-term value for our stockholders, fulfills our

mission, ensures safety and soundness of our organization and builds the value of our cooperative.

We accomplish this by tying a significant portion of compensation for our leadership team to

balanced scorecards of performance measures that are consistent with our strategy and mission.

To demonstrate our commitment to align compensation with strong governance practices that are

in our stockholders’ interests, in 2012, the Compensation Committee (Committee):

Approved a number of enhancements that strengthen the linkage between pay and

performance of the organization,

Implemented changes that place more emphasis on multiple-year measurements to

reward for sustained performance,

Reviewed the competitive marketplace to ensure competitiveness of compensation,

Reviewed the overall compensation program design, including incentive plans, to ensure

it does not encourage excessive risk taking, and

Assessed Committee governance to ensure the Committee follows best governance

practices, and modified its charter accordingly, including retaining its own independent

consultant.

Compensation Philosophy

Our compensation program is intended to:

Support a strong and enduring cooperative enterprise,

Successfully execute our mission,

Reinforce a high-performance culture through pay for performance,

Attract and retain talented staff needed to achieve our mission, and

Provide competitive total compensation opportunities that balance current rewards with

long-term opportunities, and that provide security contingent upon performance.

Linking Pay and Performance

Our framework for compensation is designed to pay for performance. To achieve competitive

compensation levels, our management must achieve strong results across multiple measures of

performance. As a result, a large percentage of their compensation is “at risk” - if Northwest FCS

results are below our plan, compensation paid will be less than competitive levels. The at-risk

component of compensation is provided through short- and long-term incentives while the “fixed”

portion is salary and benefits, as explained below.

Program Design Our compensation program for the CEO and Senior Officers has four components:

Component Purpose

Salary Pay a competitive salary to reward for experience, skills and performance.

Provide a competitive basis for other rewards based on salary.

Short-Term

Incentive Plan

(STIP)

Reward for accomplishing annual Northwest FCS’ goals that over time result

in long-term success. Reward for profitability, return on stockholder equity,

loan quality, expense control, and achieving strategic goals. Reward for

individual employee contributions.

Long-Term

Incentive Plan

(LTIP)

Reward for sustained performance, safety and soundness of Northwest FCS.

Reward for achieving multiple-year Northwest FCS’ goals for profitability,

return on stockholder equity, loan quality, capital adequacy and achieving

strategic goals. Retain top performers through long-term payouts based on

performance.

Benefits Provide financial security and convenience for our employees through a

competitive benefits program and limited perquisites; considered “indirect”

compensation.

Total Each component and the total compensation package is managed to be

competitive and ensure a linkage to performance.

Performance Assessment

The Committee implemented a framework of multiple performance metrics and goals and

individual performance assessment to reinforce our pay for performance philosophy.

This framework balances annual and multiple-year performance measurement scorecards that are

composed of multiple measures. In 2012, the Committee approved the implementation of a new

74 NORTHWEST FCS

STIP based upon multiple measures of performance, including individual performance, and a new

LTIP that is based upon multiple years of performance, replacing the prior LTIP.

The following table summarizes the scorecards for each plan:

Component Weight Measure/Goal Performance Period

STIP 30%

20%

20%

10%

20%

After-tax Net Income

Return on Equity

Adverse Assets/Risk Funds

Efficiency Ratio

Strategic Business Objectives

Annual

LTIP 15%

15%

25%

20%

25%

After-tax Net Income

Return on Equity

Adverse Assets/Risk Funds

Core Capital

Strategic Business Objectives

Multiple-Year

The Committee approves financial targets and goals for each category at the beginning of each

performance period, including minimum levels of performance that are required for an award to be

earned in each category, and maximum levels of performance on which incentive will be paid. The

approved financial targets and goals are aligned with the organization’s business plan financial

metrics to ensure Senior Officer incentives match business plan objectives. The Committee retains

discretion to adjust awards or performance assessments as needed to ensure rewards

appropriately represent pay for performance.

In addition to the measures and goals listed above, the adjustments to base salary and STIP

awards are also determined based upon individual performance of the participant. As a part of the

Northwest FCS’ performance management process, all employees are provided performance

reviews and in the case of the CEO, the performance review is conducted by the Committee with

input from the Board of Directors.

2012 Compensation Decisions

All Senior Officers appointed to serve on the MEC participate in the STIP and LTIP. The target

awards for the STIP range from 25 percent to 60 percent of salary and the actual STIP awards

may range from 0 percent to 200 percent of their target awards depending upon Northwest FCS’

performance and individual performance. STIP awards are paid in the year following the

performance period, after the Committee approves achievement of financial targets and goals and

individual awards to Senior Officers. Target awards for the LTIP implemented in 2012 range from

20 percent to 60 percent of salary with a range of opportunity from 0 percent up to 200 percent of

their target award.

The LTIP was implemented in 2012 with a plan that is based upon 2012-13 performance. In

addition, to facilitate the transition from the prior LTIP to the new LTIP, a one-year “stub-plan”

was implemented that was based upon 2012 performance. LTIP awards for the 2012 stub plan will

be paid in 2013 based upon the 2012 performance period after the Committee approves

achievement of financial targets and goals. The 2012-2013 LTIP awards, if any, will be paid in

2014.

The measures used in incentive compensation are what we believe to be the key drivers of

Northwest FCS’ long-term success, and are directly correlated to the pay received by Senior

Officers. Components of Senior Officer compensation increased or decreased in 2012 based on the

level of achievement of these goals, which are tied to Northwest FCS’ mission and strategy. To calculate incentive awards, Northwest FCS aggregates the performance under each plan and

calculates a separate Corporate Performance Factor (CPF) for the STIP and LTIP. For the STIP,

individual performance is assessed (see Performance Assessment above) and used to determine an

Individual Performance Factor (IPF) used in the incentive award calculation. Actual awards under

the STIP and LTIP for the CEO and Senior Officers were determined as follows:

Actual STIP and LTIP awards earned for the President and CEO and other Senior Officers are

presented in the Summary Compensation Table below.

Discouraging Imprudent Risk Taking

Our compensation program is structured to provide a balance of components that are based upon

multiple financial and non-financial measures of performance. It is designed to encourage the

appropriate level of risk-taking consistent with maintaining safety and soundness and


measurements aligned with our business strategy and mission. The Committee has taken the

following measures to ensure our compensation program does not encourage inappropriate risk

taking:

Implemented caps on incentive plans,

Implemented a new LTIP that measures performance over more than one year,

Designed our incentive plans to provide rewards based upon multiple financial and non-

financial measures and goals,

Incorporated individual performance that is based upon our performance management

system into the STIP awards,

Engaged our independent consultant to conduct a risk review of compensation and

benefit programs,

Approved performance targets and ranges for STIP and LTIP metrics consistent with our

business plan, strategy and mission, and

Retained discretion to adjust awards as needed.

Compensation Governance Process and Decisions

The Committee is composed of members of our Board of Directors and recommends to the Board

CEO and Senior Officer compensation decisions. In carrying out its responsibilities, the Committee

regularly reports to and consults with the Board and, when appropriate, discusses compensation

matters with the CEO. The Committee reviews pay and performance matters throughout the year

with the assistance of its independent consultant. The Committee’s process includes:

Selecting and approving performance measures in the balanced scorecards and Senior

Officer individual performance goals for performance assessment,

Reviewing mid-year performance results and accruals of STIP and LTIP awards,

Reviewing corporate performance against approved goals and determining final

achievement,

Assessing CEO performance and reviewing Senior Officer performance assessments

conducted by the CEO,

Determining each component of CEO compensation and approving each component of

Senior Officer compensation for the next fiscal year using market comparisons and

performance assessments,

Approving actual awards under incentive programs based upon performance

assessments,

Approving overall compensation plans and any design changes to compensation

programs for the next fiscal year,

Reviewing and approving programs that provide benefits or potential benefits to

management such as employment agreements, severance benefits and other benefit

programs, and

An annual assessment of the risk of programs to ensure the operation of the programs

does not create a material adverse risk to the organization.

In conducting its responsibilities as determined by the Board, the Committee has considered the

minimum requirements of this Committee including:

Long-term compensation and retirement benefit obligations and concluded these are

appropriate for the participants in the plans and their roles and responsibilities,

Incentive programs in the risk review to determine these programs are not unreasonable

or disproportionate to the services provided by Senior Officers and other employees of

Northwest FCS, and

Levels and design of Senior Officer total compensation to ensure alignment with

Northwest FCS’ strategy.

CEO Compensation

The Committee reviews the CEO’s total compensation based on the CEO’s performance, Northwest

FCS’ performance and market considerations prepared by the independent consultant. Market

considerations include compensation for CEOs of comparable financial institutions, including other

Farm Credit System entities, approved by the Committee annually. The CEO participates in the

STIP and LTIP programs provided for Senior Officers of Northwest FCS, in addition to receiving

salary and benefits. The CEO’s STIP potential in 2012 was a target of 60 percent to be awarded for

meeting these pre-established goals described above, and with the opportunity to earn up to 120

percent for exceeding those goals. The CEO’s LTIP award potential is a target of 60 percent to be

awarded for meeting these pre-established goals, with a maximum award of 120 percent for

exceeding those goals.

The “Short-term Bonus” shown in the table below reflects the STIP earned by the CEO in each

year. The “Deferred Award” shown for 2010 and 2011 reflects the LTIP award earned by the CEO

in each year together with any gains or losses incurred on these funds while held in Trust in each

of the years identified. The first award from the new LTIP represents the “stub plan” award for

76 NORTHWEST FCS

performance against pre-established goals for 2012 when this plan was implemented. In the

future, awards will be based upon either 2 or 3 years of performance.

Because Mr. DiPofi was not able to participate in Northwest FCS’ Defined Benefit Pension Plan, in

addition to his compensation outlined above, Northwest FCS makes an annual contribution to his

Non-Qualified Defined Contribution Plan. The amount is equal to the lesser of $200,000 or 15

percent of the total of his base salary and short-term incentive award each year. It is reported

under “Perquisites/Other” in the table below.

CEO Compensation shown for 2010 in the chart below reflects that paid to Mr. Penick, President

and CEO of Northwest FCS until his retirement on December 31, 2010. Compensation for the years

2011 and 2012 reflect that awarded or paid to Mr. DiPofi, who assumed the position of President

and CEO effective January 1, 2011.

Senior Officer Compensation

Senior Officers participate in the STIP and LTIP in addition to receiving base salary and benefits

generally provided to management personnel. The Committee reviews the Senior Officers’ total

compensation based on their individual performance assessments provided by the CEO, Northwest

FCS’ performance and market considerations prepared by the independent consultant using the

same comparable financial institutions as used for the CEO’s compensation. The STIP and LTIP

provide Senior Officers the opportunity to earn awards as a percent of their base salaries for

meeting pre-established performance goals. For 2012, STIP targets ranged from 25 percent to 40

percent with the potential to earn a maximum of 50 percent to 80 percent for exceeding those

goals, and LTIP targets ranged from 20 percent to 35 percent with the potential to earn a

maximum of 40 percent to 70 percent for exceeding those goals.

Summary Compensation Table

The compensation shown in the table below is the actual compensation earned by the CEO and

Senior Officers during the years ended December 31, 2012, 2011, and 2010. The short-term

incentive shown in the next table for the Senior Officers reflects the combined short-term incentive

earned in each year, which is paid to these Senior Officers in the following year once final year-end

financial performance has been determined. The “Deferred Award” in this chart reflects the

combined long-term awards to the Senior Officers who participated in a long-term incentive plan in

the year they were earned, together with any gains or losses incurred on those awards that are

held in trust, in the year identified. These awards are subject to market value fluctuations while

held in trust. Therefore, the amount actually paid reflects those gains/losses while held in Trust.

The first award from the new long-term plan represents the “stub plan” award for performance

against pre-established goals for 2012 when this plan was implemented. In the future, awards will

be based upon either 2 or 3 years of performance, as previously discussed.

* Jay Penick (2010 only) and Phil DiPofi (2011 and 2012 only)

**Deferred Awards – This figure reflects the principal amount of the long-term incentive earned in

each of the years shown along with gains/losses incurred on the funds held in trust that year. In

the case of Senior Officers, this amount also includes retention awards made to those officers who

did not participate in the long-term incentive plan.

***Perquisites/Other - The CEO and select Senior Officers are provided a leased vehicle for their

business and personal use. The income related to personal use of those vehicles, as determined by

Internal Revenue Service regulations, is included in the their total compensation. This item

includes 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.

The 2010 figure includes a one-time retention payment made to Mr. Penick to assist with the

transition to the new CEO as needed throughout 2011, and the residual value of the leased vehicle

that was given to Mr. Penick on his retirement. The 2011 and 2012 figures include the income

related to Mr. DiPofi’s personal use of the leased vehicle he is provided, and the annual

contribution to his nonqualified deferred compensation plan described above. In addition, the 2011

figure also includes a portion of his moving and relocation expenses that were “grossed up” to

compensate him for the tax impact of those reimbursed expenses.

****The number of Senior Officers (excluding the CEO) shown in the chart above who served in

2012 was eight; in 2011 was ten; and in 2010, was seven and included Mr. DiPofi, who served as

COO – President and CEO-elect during the month of December 2010.


Total compensation paid during the last fiscal year to any Senior Officer, or to any other employee

included in the aggregate, is available and will be disclosed to stockholders upon request. Senior

Officers are reimbursed for travel expenses and related expenses while conducting business for

Northwest FCS.

The combined long-term awards actually paid to the Senior Officers (excluding the CEO) were

$179,550, $1,281,804 and $265,169 for the years 2012, 2011 and 2010, respectively. These

reflect long-term awards made in 2008, 2007 and 2006, respectively, that were actually paid out in

the years noted and include gains/losses on those amounts while held in trust. This includes the

retention payment made to those Senior Officers who do not participate in the long-term incentive

plan. The 2011 figure also includes the complete payout of all LTIP awards held in trust for two

Senior Officers who retired in 2011.

TRANSACTIONS WITH SENIOR OFFICERS AND DIRECTORS

Information regarding related party transactions is incorporated herein by reference from Note 12

to the financial statements included in this annual report.

INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

There were no events during the past five years that are material to evaluating the ability or

integrity of any person who served as a director or Senior Officer on January 1, 2013, or at any

time during 2012.

RELATIONSHIP WITH INDEPENDENT PUBLIC AUDITORS

There were no changes in independent public auditors since the prior annual report to

stockholders. There were no material disagreements with the independent public accountants on

any matter of accounting principles or financial statement disclosure during this period.

AUDIT FEES AND EXPENSES

Fees and expenses incurred by Northwest FCS for audit services rendered by its independent

auditors, PricewaterhouseCoopers, LLP, for the years ended December 31, 2012, 2011 and 2010,

were $368,500, $368,500 and $379,500, respectively. These fees and expenses were incurred for

the annual financial statement audit, including the audit of internal controls over financial reporting

as of December 31, 2012, 2011, and 2010.

FINANCIAL STATEMENTS

The financial statements, together with the Report of Independent Auditors dated March 1, 2013,

and the Report of Management appearing in this annual report, are incorporated herein by

reference.

RELATIONSHIP WITH COBANK, FCB

Northwest FCS’ statutory obligation to borrow from CoBank, FCB is discussed in Note 7.

CoBank, FCB’s ability to access the capital of Northwest FCS is discussed in Note 4.

The major terms of any capital preservation, loss sharing or financial assistance agreements

between Northwest FCS and CoBank, FCB are discussed in Notes 1 and 8.

A discussion of how the financial condition and results of operations of CoBank, FCB may

materially affect stockholder investment in Northwest FCS and Northwest FCS’ investment in

CoBank, FCB is discussed in Note 1.

CoBank, FCB is required to distribute its annual report to shareholders of Northwest FCS if a

“significant event,” as defined by FCA regulation occurs.

PRIVACY PROTECTION AFFORDED UNDER FCA REGULATIONS

Customer financial privacy and the security of other non-public information are important.

Therefore, Northwest FCS holds customer financial and other non-public information in strict

confidence. Federal regulations allow disclosure of such information by Northwest FCS only in

certain situations.

78 NORTHWEST FCS


DESCRIPTION AND STATUS REPORT ON THE YOUNG, BEGINNING AND SMALL FARMERS 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 (YBS) in our territory. The definitions of young,

beginning, and small farmers and ranchers, as developed by the Farm Credit Administration follow:

• 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 $250,000 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.

Objectives of the program: • To support agriculture by encouraging and developing 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:

o Exhibit the management skills necessary to build a solid financial position.

o Contribute to the agricultural community.

o 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 Several credit and related services are offered through the Board approved YBS program directly

and in coordination with other organizations that allow Northwest FCS to effectively serve the

needs within these producer segments:

• AgVision is the Board approved program that enriches our ability to serve the young,

beginning, small, and minority producers who are actively involved in farming and those who

may not meet traditional credit standards. AgVision customers account for approximately

$245 million of 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 over

$100,000 in fees waived in 2012.

• More than $425,000 has been reimbursed to customers for educational expenses, technology

purchases, recordkeeping, and tax planning and preparation services since the 2001 inception

of the AgVision program. Reimbursements totaled $66,488 in 2012.

• An advisory group 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 impact within the agricultural community.

• Training programs are targeted to young, beginning, small, and minority producers, focusing

on areas such as farm economics, financial literacy, profitability, cash flow and succession

planning. Several workshops are held in Spanish each year.

• The Northwest FCS’ Business Management Center helps customers assess, understand, and

improve management practices through group and individual interactions via orientations,

workshops, and consulting. Many 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, agricultural leadership and educational

programs, and other youth programs.

• In 2012, Northwest FCS awarded thirty-two $1,500 college scholarships to qualified high

school seniors and twelve $1,500 scholarships to college students.


• Northwest FCS offers many services; including crop insurance, life insurance, and debt

protection that help our YBS producers mitigate risk.

• 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.

Government Guaranteed Loans to YBS Farmers and Ranchers

Regional Demographics The service area of Northwest FCS primarily includes the states of Washington, Montana, Oregon,

Idaho, and Alaska. The following table compares demographic information from the USDA’s 2007

Census of Agriculture for young, beginning, and small producers in the territory to the 2002

census. This census is conducted every five years. 2012 Census data will be available in early

2014.

Census of Agriculture - Young, Beginning, and Small Producers

2007 vs. 2002

The 2007 Census of Agriculture results show a 2 percent increase in young producers, a 1 percent

increase in small producers and a 3 percent decrease in beginning producers from 2002 to 2007.

YBS Volume in the Northwest FCS Portfolio The following table reflects the percentage of young, beginning and small producers’ loans in the

Northwest FCS loan portfolio as of December 31, 2012. Methods by which the Census

demographics and the Northwest FCS’ data presented differ. The Census data is based on number

of producers, while the Northwest FCS’ data is based on number of loans.

Young, Beginning, Small Farmers and Ranchers – Number and Volume of Loans

Outstanding (Including available commitment)

Goals and Results Quantitative targets have been established by Board policy for young, beginning and small

producers’ loan volume and numbers based upon demographic data. These targets are as follows:

2012 Young, Beginning and Small Service Goals & Results

The data reveals Northwest FCS met its loan number and volume goals for young producers.

Although the data reveals that Northwest FCS did not meet its loan number goals for beginning

and small producers, Northwest FCS did see an increase in small producers from 2011. Some of

the decrease in volume and numbers can be attributed to the positive agricultural environment in

2012. Northwest FCS will continue its mission to advance young, beginning, and small farmers

through deliberate lending strategies and educational opportunities.

80 NORTHWEST FCS

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82 NORTHWEST FCS

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Northwest Farm Credit Services 2012 Annual Report

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