northwest farm credit services 2011 annual report

It’s All About

The Land. 2011 Annual Report

For more than 95 years the Farm Credit System has provided farmers and ranchers with a reliable source of credit needed to purchase land and operate our businesses. Here in the Northwest we serve nearly 150 di�erent commodities in a territory that spans close to 1,500 miles. Given our tenure as a lender and the diversity of agriculture, Northwest Farm Credit Services truly understands the value of land and trends in the agricultural marketplace better than any other lender in the Northwest.

We believe the heart of Northwest FCS’ mission and value lies in our cooperative structure. As the largest �nancial cooperative in the Northwest, we exist to provide essential capital to rural America and return value to our customer-owners. Through ownership, Northwest FCS customers have a unique say in the governance of this association by electing board members with agricultural, �sheries or forest products backgrounds to represent them. More than 180 Local Advisor Committee members, representing customers in 48 branches, also serve as the eyes and ears of this associa-tion. They share what they’re seeing and hearing in the marketplace to reinforce what we’re doing well or to identify areas we need to improve.

As a cooperative, we also share our �nancial success with customers-owners in the form of patronage returns. This year the board and management team reviewed the history of our patronage program and chose to make some changes. We felt customers should be able to better predict patronage levels from year-to-year and that the overall level of patronage should increase. Going forward, the board has set a target level equal to .75 percent of a customers‘ average loan balance for patronage.

In 2011, we were extremely fortunate to have Phil DiPo� serving at the helm of Northwest FCS as President/CEO. Prior to joining Northwest FCS, Phil served as chief banking o�cer of CoBank, which is Northwest FCS’ funding bank and strategic business partner. Phil’s breadth of business knowledge and experience, along with his global view and understanding of the issues faced by our association and the Farm Credit System, continue to be tremendous assets.

We would like to thank director and Montana rancher Ed Malesich who retires from the board after 13 years of service. Ed’s wisdom and even-handed nature pro-vided long-term stability for the organization, particularly during times of economic volatility. We wish Ed and his family the best.

2011 was a tremendous year for Northwest FCS. On behalf of the Northwest FCS Board we thank you for your continued business and trust. Together we accomplish great things.

President Woodrow Wilson signs the Federal Farm Loan Act, creating Federal Land Banks.

Ag-land values in the Northwest:Idaho $69/acre, Montana $22/acre,Oregon $50/acre, Washington $69/acre. Capper-Volstead Act authorizes the

creation of farmer cooperatives.

The Agricultural Credit Act of 1923 creates 12 Federal Intermediate Credit Banks. The Fiscal Agency O�ce opens to manage the sale of Farm Credit Bonds. Federal Land Bank bonds exceed

$1 billion for the �rst time. The Federal Land Banks repay the federal capital used for the initial 1916 funding.

194019331932

Ag-land values in the Northwest:Idaho $33/acre, Montana $8/acre,Oregon $27/acre, Washington $39/acre.

The Farm Credit Act of 1933 authorizes local Production Credit Associations and created 13 Banks for Cooperatives to expand short- and intermediate-term credit.

19261923192219201916

Celebrating 95 Years of Credit for Agriculture

2007 2008 2009 2010 2011

28.6

31.1

26.0

36.0

53.3

A strong history ofstewardship and integrity.Kevin Riel, Board Chair

32

PATRONAGE PAID($ in millions)

Agriculture has been – and will continue to be – one of the greatest success stories in the United States. And I truly believe the best days lie ahead. As we close in on nearly a century of serving farmers and ranchers, I feel the same sense of optimism about the prospects for Northwest Farm Credit Services. The outlook is bright, though it will take continued ingenuity and discipline to capture the opportunities ahead. Just as farmers and ranchers have been model stewards of the land, our team has the same obligation – to be exceptional stewards of your cooperative in an environment of challenges and exciting opportunities.

The past several years have been marked by signi�cant stress and instability in �nancial markets and the economy in general. Volatility, uncertainty, and in many ways anxiety about what the future holds has permeated all aspects of the economy. Through the e�orts of a dedicated sta� and board at Northwest FCS, we have built the necessary resources to support our customers, while maintaining strong disciplines needed to avoid the negative consequences that have impacted the banking industry. Most importantly, we have established the necessary �nancial capacity and experienced sta� to provide constructive credit to our customer-owners through these unprecedented, volatile times.

Core Values and Strengths

In an industry where uniqueness is di�cult to come by and even harder to preserve, we will continue to sharpen our competitive advantages. We are the largest

�nancial cooperative in the Northwest with a number of unique qualities that clearly separate us from other credit providers:

• Entirely focused on the agricultural, food and fiber industries.

• A proven track record of being even handed through various commodity and economic cycles.

• Relationship managers and staff who have attained trusted advisor status with customers.

• Our cooperative structure with farmer-elected governance and strong patronage dividends to customer-owners.

• A reliable network of local advisors who provide customer feedback from each of our 48 branches.

• Membership in the Farm Credit System which allows us to partner with like-minded cooperatives that participate in larger loans and issue debt to fund loans on a consolidated basis, which lowers our funding costs.

2011 was a very successful year for Northwest FCS. We had record net income of $159.2 million and our capital increased to $1.4 billion. Unlike commercial banks who share earnings in the form of dividends to third-party investors, Northwest FCS

customer-owners directly bene�t from the success of their cooperative. For 2011 we returned a record $53 million in patronage. This equates to a .75 percent return on our customers’ average loan balance during the year.

Trends in Agriculture

Global demand for agriculture is expected to increase signi�cantly over the long term, which favors Northwest producers due to the diversity and quality of produc-tion and proximity to export markets. If projections hold true, U.S. net farm income will exceed $100 billion in 2011 for the �rst time – a 28 percent increase from 2010. USDA expects crop and livestock sales by U.S. farmers to increase more than 16 percent in 2011. On the other side of the ledger, production expenses in 2011 increased by 12 percent. All-in-all, it was an excellent earnings years for most of our customers.

Looking Ahead

We expect extreme volatility again in 2012. When Europe is in recession, the euro weakens and the U.S. dollar strengthens. This will be bearish for U.S. commodities. More than 20 percent of total U.S. exports go to Europe and they are a large source of demand for global products. Volatility doesn’t necessarily mean lower than average commodity prices, however it will require a more concerted e�ort to manage through the uncertainties.

A bubble in real estate or housing is characterized by a rapid increase of value that reaches unsustainable levels. Is there a bubble in Paci�c Northwest land values? Many in�uences support farmland values: strong world demand for food, strong farmer balance sheets and low interest rates. While there’s little evidence of excessive lending in the marketplace, rental rates on ag land are increasing at an accelerated rate. Current and projected economic conditions generally support the increase in values, yet optimism should be tempered with caution at this point.

Volatile weather plagued farm country throughout 2011. Most crops in the Northwest had some weather issues and we should expect more of the same in 2012.

The last two years have been outstanding earning years for most agricultural producers with many experiencing high levels of net cash income. This boost in incomes, combined with low interest rates and a dependable source of credit, will allow producers more opportunities to expand, reduce debt, increase working capital, and take advantage of other investment opportunities.

The world increasingly depends on the United States to provide food beyond its borders, which is driving tremendous advances in farm productivity. Being a depend-able provider of capital who is completely geared to meet the credit needs of Northwest agriculture is a responsibility we take seriously. We are humbled by the responsibility of serving our nearly 13,000 customer-owners and privileged to be part of this tremen-dously important value chain of agriculture.

2007 2008 2009 2010 2011

114.1

124.4

106.1

150.1159.2

2007 2008 2009 2010 2011

1.1 1.11.2

1.31.4

The Federal Farm Credit Board of Directors was formed to develop national policies for the System and to direct the Farm Credit Administration.

The 1955 Farm Credit Act creates a plan for cooperative farmer-borrowers to achieve full ownership of the Banks for Cooperatives.

Ag-land values in the Northwest: Idaho $12/acre, Montana $35/acre, Oregon $88/acre, Washington $133/acre.

Production Credit Associations and Banks for Cooperatives pay o� federal capital. The Farm Credit System is now owned and capitalized entirely by borrowing stockholders.

Farm Credit’s lending authority expands to allow “credit related services” including leases, consulting, crop insurance, as well as loans to �shermen, rural homeowners and rural electric and telephone cooperatives.

Producers in the Northwest receive Farm Credit �nancing through 40 independent Federal Land Bank Associations and 30 independent Production Credit Associations.

198919801972

Ten of the 12 Banks for Cooperatives voted to merge with the Central Bank for Cooperatives to form CoBank.

Ag-land values in the Northwest: Idaho $698/acre, Montana $235/acre, Oregon $587/acre, Washington $736/acre.

19711968196019551953

NET INCOME AFTER TAXES($ in millions)

C APITAL ($ in billions)

Building on acompetitive advantage.Phil DiPofi, President and CEO

54

40 Federal Land Bank Associations merge to form Interstate FLBA. 30 Production Credit Associations merge to form Interstate PCA. Both entities merged to form Northwest FCS, ACA in 1991. Northwest FCS launches its �rst

website at www.farm-credit.com.

Northwest FCS returns patronage tocustomer-owners for the �rst time ($17.5 million). Ag-land values in the Northwest:Idaho $1,150/acre, Montana $330/acre,Oregon $1,050/acre, Washington $1,250/acre.

Northwest FCS’ Business Management Center initiates family business facilitation and planning services.

Northwest FCS convenes approximately 100 front-line sta� to form 11 new Knowledge Teams that gather and synthesize market information on various commodities.

2011-201220112010

Ag-land values in the Northwest: Idaho $2,050/acre, Montana $710/acre, Oregon $2,000/acre, Washington $2,090/acre.

Northwest FCS’ Business Management Center o�ers 13 educational programs with 27 dates across the Northwest serving approximately 1,000 customers. The BMC e-newsletter is sent to approximately 600 stakeholders.

More than $100 million in claims are paid to support Northwest FCS Insurance Agency customers for the 2009 crop year.

20062004200019971990

2011

ManagementExecutive

Committee

2011

Board ofDirectors

(pictured left to right)

Stacy Lavin General Counsel; Kathy Payne Executive VP-HR and Corporate Administration;

Tom Nakano Executive VP-Chief Financial O�cer; Brent Fetsch Senior VP-Chief Strategy O�cer and Chief Information O�cer;

Phil DiPo� President and Chief Executive O�cer; Fred DePell Executive VP-Financial Services;

John Phelan Executive VP-Chief Risk O�cer; Jim Allen Senior VP-Capital Markets.

(pictured left to right)

Dave Hedlin Mt. Vernon, Washington; Julie Shi�ett Spokane, Washington; Shawn Walters New Dale, Idaho;

Ed Malesich Dillon, MT; Rick Barnes Callahan, California; Kevin Riel Chair – Yakima, Washington;

Bruce Nelson Spokane, Washington; Dave Nisbet Bay Center, Washington; Karen Schott Vice Chair – Broadview, Montana;

Mark Gehring Salem, Oregon; Jim Farmer Nyssa, Oregon; Christy Burmeister-Smith Newman Lake, Washington;

Herb Karst Sunburst, Montana; Drew Eggers Meridian, Idaho.

76

“Northwest Farm Credit is our partner and they understood the value of our growth strategy. We were partnering with a well-established commercial real estate company, but another bank may have said, ‘What is a timber company doing in commercial real estate?”

Toby Luther, Lone Rock Resources

98

Forward Thinking

Family businesses often re�ect the character of their patriarchs. Lone Rock Resources is no exception. Fred Sohn was an innovator. With a background in �our milling, Fred knew virtually nothing about lumber mills when he moved his young family to Roseburg, Ore. in the late 1940s to build one from scratch. Sun Studs manufactured everything from broom handles to telephone poles back then. They were the �rst lumber mill in the world to computerize operations, developing laser scanners to maximize output from each log. The technology which is standard today doubled the volume of traditional mills. Yet, Fred Sohn’s bold vision extended beyond processing to the land he loved and respected. Over the years the family invested heavily in timberland assets, eventually selling the mill in 2001. Today Lone Rock manages and maintains more than 115,000 acres.

Managing the land sustainably from an environmental and economic perspec-tive is Lone Rock’s founding principle. The company invests heavily in genetics and reforestation practices. Trees are harvested on a sustainable yields plan that estimates volume every year for the next 50 years. Mindboggling. This strategy allows Lone Rock the �exibility to harvest above sustainable yields when prices are high and less when prices are low while always maintaining a sustainable yield harvest approach.

Management succession has been a key to Lone Rock’s success. Fred’s �ve sons served on the board of directors when he retired, with sons Howard and Rick managing the business as Chairman and President/CEO respectively. When the second generation retired in 2008, Lone Rock appointed its �rst non-family-member CEO, Toby Luther, and the board was restructured to include third-generation family members and outside directors, all with a goal to expand the business.

A bold strategic plan was developed through shareholder interviews with 20+ family members across the country. What was important to them? What did they expect in dividend returns? If the company could make more money selling the land assets and investing elsewhere, was that okay? As one might imagine, there was a strong desire to increase dividends to support growing families – a strategy requiring investments in other lines of business. Yet, there was an equally strong, unanimous desire that timber and timberland remain the primary focus of the Sohn family heritage.

1110

^ Sun Studs mill – 1950

“We were able to �inance Lone Rock to diversify into other assets because we understand the value

of their ownership base in timberland.”

Suann Harris, Assistant Vice President-Agribusiness

Lone Rock’s strategy team explored new lines of business that would complement the timber operation and leverage expertise. Commercial real estate was one, used by similar companies with experience managing long-term, hard assets. If Lone Rock was going to diversify into other real estate assets they needed solid �nancial partners.

“We were working with Northwest Farm Credit and a large commer-cial lender,” says Toby. “Commercial banks were in a lot of trouble in 2009 when we rolled out the new strategies. Our commercial banker said, ‘I think you’re overestimating your ability to get funding in this environ-ment.’ That’s when Northwest Farm Credit stepped up. We shared our strategies, models and analysis with them, including exit strategies if things didn’t work. We know Farm Credit is an agricultural lender and not necessarily a commercial real estate lender. But, they understand timber-land assets better than anyone. In the end, they built the �nancing package based solely on the value of our timberland operations that still allowed us to execute our new corporate growth strategy.”

“We certainly haven’t been a static company the past few years and Northwest Farm Credit has been a huge partner in the whole process,” says Lone Rock Board of Director Paul Sohn. “My background is on Wall Street where I manage a hedge fund portfolio. I’m very famil-iar with the problems other banks have had. I like to contrast the large, money-center bank mentality to Farm Credit who really understands and works with their customers. There’s no comparison.”

Lone Rock Resources and the Sohn family continue to explore ways to enhance the company’s equity to gain better returns. But ultimately, the families’ roots lie deep in the lush Oregon woods. Here they gather each summer for a shareholder meeting and reunion at the family ranch. There are woods tours and summer jobs for the next generation. The Sohn family legacy is timber after all, and planning 50 years ahead is their specialty.

“Food and agricultural systems will continue to evolve to meet growing global demand, particularly from developing countries. We must take on new technologies that lead to new opportunities and new market channels in order to leverage our core competencies and experiences.”

Bill Whitacre, J.R. Simplot

Sustainable Legacy

J.R. ‘Jack’ Simplot began his career in agriculture at the age of 14 when he quit school and went into business for himself near the small farming community of Declo, Idaho, in 1923. He bought his �rst piece of ground three years later. With an unyielding commitment to innovation and e�ciency, J.R. purchased Idaho’s �rst mechanized potato sorter in 1928 and later invested in an innovative vegetable dehydration system. By the early years of World War II, the Simplot Company was the largest shipper of fresh potatoes in the country and was selling millions of pounds of dehydrated onions and potatoes to the military. When wartime shortages made it di�cult to buy fertilizer, Jack built a manufacturing plant in Pocatello, Idaho, and produced his own. This type of ingenuity and forward think-ing also led to a postwar breakthrough – the �rst commercially viable frozen french fries in the world. Yet, given all the early accomplishments J.R. was often quoted as saying, “I’m just an old dirt farmer who made good. It’s all about the land.”

Today the J.R. Simplot Company’s integrated portfolio includes farming, ranch-ing, cattle production, phosphate mining, fertilizer manufacturing, food processing, and food brands. With sales of approximately $5.6 billion, the privately-held family business has more than 30 farms, a dozen ranches with 30,000 mother cows, one of the largest herds in the country, and is the largest phosphate producer in the West. Simplot employs more than 10,000 people worldwide and produces 1,000 di�erent food products for the foodservice industry, ranging from a variety of

potato products to avocados, fruits and vegetables.

While Simplot may be vast in scope, the company still operates with small town values. Their philosophy is simple: “to do well by honoring their commitments.” These commitments include the company’s pledge to sustainability. For Simplot, sustainability includes developing technologies that have the potential to decrease the land, energy and fresh water needed for agriculture, while increasing the per-acre productivity needed to feed an additional three billion people within the next 50 years.

“Producing more with less of our earth’s resources is not only good for business but it is truly the right thing to do,” says Simplot President and CEO Bill Whitacre. “At Simplot we have three fundamental principles – a passion

1312

“My dad always said, ‘Get a piece of America and hold on to it.’ That’s what it’s all about. We’re farmers and we need to know our land and treat it at its highest and best use. The

drive for ef�iciencies will be the key moving forward.”

Scott Simplot, J.R. Simplot Company

1514

< Planting Simplot potatoes – 1944

“ I’m just an old dirt farmer who made good.

It’s all about the land.”J.R. Simplot

for people, a commitment to innovation and technology and a respect for resources, particularly natural resources. It’s how we do business.”

Recycled potato by-products from Simplot food processing plants provide a nutrient-rich feed source for their livestock operations. Manure is derocked, composted and applied to build soil quality for Simplot farms and neighboring operations. Anaerobic digesters installed at a number of food processing plants capture biogas, which is used to power the plants’ boiler systems. The Moses Lake, Washington, facility for example, has reduced greenhouse gas emissions by 15,000 tons annually in the process. Water recovery and conservation e�orts in the Pocatello, Idaho, fertilizer plant has saved more than one billion gallons of fresh water in two years, or enough to sustain 10,000 average households for a year.

“We continue to invest heavily in new technolo-gies to grow and process food, help farmers and ranchers optimize pro�ts and make everyone’s life a little better,” says Simplot Board Chairman Scott Simplot. “We look at agriculture as a whole system of activities, from plant nutrients to food processing to taking care of our land and water resources. That’s why we need a lender who understands agriculture and the investments we’re making. The wiser the lender the easier it is to talk to them and Northwest Farm Credit has been a wonderful business partner.”

“If a family doesn’t have the next generation coming back, or their kids inherit the land, will they sell ground at the highest price or give a young farmer a chance? It’s their preference. But, I wouldn’t have this opportunity without Bob and the people at Northwest Farm Credit.”

Chad Dees, Dusty Bins Farm(with Credit Of�icer, Jennifer Roberts)

Growing Opportunities

Bob Reinhart and his late wife Kathryn could have sold their property for top dollar. Competition for purchasing and leasing farm land is extremely �erce in northern Montana where prices continue to rise. There were plenty of producers wanting to grow and expand. But, Bob never forgot the opportunity he had as a young man to begin farming with Kathryn’s family in 1946. Then, when Kathryn passed away and her will designated a portion of the land be sold to a beginning producer, Bob went a step further. He would honor his wife’s memory by selling the land below market value to Chad Dees, the hardworking neighbor boy they watched grow to adulthood.

Chad was working construction back then and coming home on weekends to help his dad farm. Given the economic realities, Chad �gured he would need to work both jobs until his father Chuck could a�ord to retire someday. Chuck was trying to �nd ways to lease Chad ground and meet his own �nancial obligations when Bob stepped forward with an o�er. He would lease Chad 1,000 acres on a generous crop-share agreement. Months later, Chad was also given the opportunity to buy the land set aside in Katheryn’s will.

“I had the opportunity of a lifetime so I thought that over,” says Bob. “Most young people today don’t have the same oppor-tunities I had. Everything has gotten so expensive. Back in our day we didn’t fertilize, we didn’t spray, and those can cost thousands of dollars. To get a farm today you almost need to marry one, or inherit one, and then you need to have enough money to run it. Or, you can go see Northwest Farm Credit.”

Chad Dees was a perfect �t for Northwest FCS’ AgVision pro-gram, which helps young and beginning producers get started in agriculture. Credit O�cer Jennifer Roberts helped Chad secure an operating loan and a real estate loan with joint �nancing from Farm Service Agency’s Beginning Farmer Down Payment Program. With the unique �nancing package, Chad only needed 5 percent down; FSA �nanced 45 percent over 20 years at 1.5 percent interest, and Northwest FCS funded the balance over 30 years to help Chad meet his cash �ow projections.

1716

“My wife’s parents gave me the opportunity of a lifetime to start farming many years ago. Young people today

don’t have the opportunities I had. That’s why we wanted to help another young producer. I’m proud

of what Kathryn and I accomplished all those years.We had a wonderful life together.”

Bob Reinhart

Helping young producers get started.

“Northwest Farm Credit is a great company,” says Chad. “They really focus on helping younger producers get started. Coming from the construction industry I didn’t have a lot of experience doing the books. Jennifer helped me understand the meaning behind the numbers and estimate my �rst year expenses.”

“I think mentorship is the most impor-tant part of the AgVision program,” says Jennifer. “Sure, the fee waivers and reduced interest rates are a good thing. But the real value is the amount of time we can actually spend on these accounts to help beginning producers understand their �nances. We help them appreciate why knowing their �nancial ratios and maintaining certain capital levels are important. Chad picked up the numbers quickly and he had a great �rst year. That’s the most rewarding part of my job.”

< Kathryn Reinhart – 1944

18

2011 NORTHWEST FARM CREDIT SERVICES, ACA Annual Report to Stockholders

1

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 (Northwest FCS) are prepared by

management, who is responsible for their integrity and objectivity, including amounts that must be

necessarily based on judgments and estimates. The financial statements have been prepared in

conformity with accounting principles generally accepted in the United States of America. The

financial statements, in the opinion of management, fairly present the financial condition of

Northwest FCS. Other financial information included in the 2011 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 2011 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, 2012

Tom Nakano

Executive VP-CFO

March 1, 2012

Kevin Riel

Chair of the Board

March 1, 2012

2


MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of Northwest Farm Credit Services, ACA and its wholly-owned subsidiaries

(Northwest FCS) is responsible for establishing and maintaining adequate internal control over

financial reporting for Northwest FCS’ consolidated financial statements. For purposes of this

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

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

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

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

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

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

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

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

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

permit preparation of financial information in accordance with accounting principles generally

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

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

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

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

statements.

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

over financial reporting as of December 31, 2011. In making the assessment, management used

the framework in Internal Control—Integrated Framework, promulgated by the Committee of

Sponsoring Organizations of the Treadway Commission, commonly referred to as the “COSO”

criteria.

Based on the assessment performed, Northwest FCS concluded that as of December 31, 2011, the

internal control over financial reporting was effective based upon the COSO criteria. Additionally,

based on this assessment, Northwest FCS determined there were no material weaknesses in the

internal control over financial reporting as of December 31, 2011.

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, 2012

Tom Nakano

Executive VP-CFO

March 1, 2012

Kevin Riel

Chair of the Board

March 1, 2012

3


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

2011, the Audit Committee met six times in person and participated in several conference calls.

The Audit Committee oversees the scope of Northwest FCS’ internal audit program, the

independence of the outside auditors, the adequacy of Northwest FCS’ system of internal controls

and procedures, and the adequacy of management’s action with respect to recommendations

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

of PricewaterhouseCoopers, LLP (PwC) as our independent auditors for 2011. 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 to issue their report

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

processes.

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

the year ended December 31, 2011, with management. The Audit Committee also reviewed with

PwC the matters required to be discussed by Statement on Auditing Standards No. 114, as

amended (Communication with Audit Committees), and both PwC and the internal auditors directly

provided reports on significant matters to the Audit Committee.

The Audit Committee received the written disclosures and the letter from PwC in accordance with

Independence Standards Board Standard No. 1 (Independence Discussion with Audit Committees),

and discussed with PwC its independence. The Audit Committee requires prior approval of all non-

audit services provided by PwC. In 2011, PwC was engaged for tax compliance work. The Audit

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

assurances from them as the Audit Committee deemed appropriate.

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, 2011.

Christy Burmeister-Smith

Chair of the Audit Committee

March 1, 2012

Herb Karst

Julie Shiflett

Dave Nisbet

Ed Malesich

Jim Farmer

4


Five-Year Summary of Selected Financial Data (dollars in thousands) December 31, 2011 2010 2009 2008 2007

BALANCE SHEET DATA Cash $ 62,188 $ 47,229 $ 87,172 $ 60,966 $ 79,319 Loans 8,285,356 8,286,216 8,122,932 7,884,852 6,571,850 Less: allowance for loan losses 126,500 111,000 96,000 48,000 33,000 Net loans 8,158,856 8,175,216 8,026,932 7,836,852 6,538,850

Investment in and receivable from CoBank, ACB 309,141 306,931 304,254 274,631 243,521 Other property owned, net 6,211 9,562 524 1,328 11 Deferred tax asset, net 8,322 9,655 6,651 2,675 987 Other assets 152,029 156,837 153,911 149,748 158,293 Total assets $ 8,696,747 $ 8,705,430 $ 8,579,444 $ 8,326,200 $ 7,020,981

Obligations with maturities of one year or less $ 2,752,884 $ 2,567,577 $ 2,471,731 $ 2,631,691 $ 2,171,946 Obligations with maturities greater than one year 4,505,393 4,798,301 4,888,643 4,561,050 3,784,014

Total liabilities 7,258,277 7,365,878 7,360,374 7,192,741 5,955,960

Capital stock and participation certificates 13,119 13,087 12,762 12,410 11,833 Accumulated other comprehensive loss, net of tax (30,052) (23,046) (29,097) (34,302) (8,595) Unallocated retained earnings 1,455,403 1,349,511 1,235,405 1,155,351 1,061,783

Total members' equity 1,438,470 1,339,552 1,219,070 1,133,459 1,065,021

Total liabilities and members' equity $ 8,696,747 $ 8,705,430 $ 8,579,444 $ 8,326,200 $ 7,020,981

STATEMENT OF INCOME DATA Net interest income $ 261,307 $ 247,445 $ 230,835 $ 192,001 $ 166,230 Provision for credit losses 47,341 63,056 79,381 19,239 5,090 Noninterest income 70,032 78,341 68,796 59,175 52,577 Noninterest expenses 118,542 109,430 116,517 101,565 96,862 Income tax provision/(benefit) 6,300 3,236 (2,352) 5,998 2,728

Net income $ 159,156 $ 150,064 $ 106,085 $ 124,374 $ 114,127

KEY FINANCIAL RATIOS FOR THE YEAR Return on average assets 1.9% 1.8% 1.3% 1.6% 1.8% Return on average members' equity 11.3% 11.6% 9.0% 11.2% 11.1% Net interest income as a percentage of average earning assets 3.2% 3.1% 2.9% 2.7% 2.7% Net charge-offs as a percentage of average loans 0.3% 0.6% 0.4% 0.1% 0.0%

AT YEAR END Members' equity as a percentage of total assets 16.5% 15.4% 14.2% 13.6% 15.2% Debt as a ratio to members' equity 5.0:1 5.5:1 6.0:1 6.3:1 5.6:1 Allowance for loan losses as a percentage of loans and interest 1.5% 1.3% 1.2% 0.6% 0.5% Permanent capital ratio 13.8% 13.2% 12.2% 12.7% 14.7% Core capital ratio 13.7% 13.0% 12.1% 12.3% 13.7% Total surplus ratio 13.7% 13.0% 12.1% 12.5% 14.5%

OTHER Loans serviced for other entities $ 1,769,143 $ 1,652,027 $ 1,614,756 $ 1,552,890 $ 1,317,687 Patronage dividends declared to members $ 53,264 $ 35,958 $ 26,031 $ 31,125 $ 28,550

5


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following commentary is a review of the financial condition and results of operations of

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

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

accompanying financial statements and notes. Stockholder investments in Northwest FCS are

materially affected by the financial condition and results of operations of CoBank, ACB. To obtain a

free copy of the CoBank Annual Report to Stockholders, please contact us at Northwest Farm

Credit Services, ACA, P.O. Box 2515, Spokane, Washington 99220-2515, call

(509) 340-5300, or access CoBank’s website at www.cobank.com. Dollar amounts are in thousands

unless otherwise stated.

The financial statements were prepared under the oversight of the Audit Committee.

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; 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.

2011 Financial Highlights The year ended December 31, 2011 reflected positive financial performance. Record earnings and

a strong capital position allowed us to declare a cash patronage distribution of $53.3 million

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

based on their average 2011 loan balances. This return of value helped reduce our customers’

financing costs. Other highlights include:

• Net income for the year was $159.2 million, up 6.1 percent from 2010. This increase was

driven by a rise in net interest income over 2010, achieved largely from decreased funding

costs and a reduced provision for loan loss expense when compared to the prior year.

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

31, 2011, our members’ equity totaled $1.4 billion, and our permanent capital ratio was 13.8

percent.

• Our loan portfolio volume remained relatively unchanged in 2011, with an ending gross loan

and accrued interest balance of $8.4 billion.

• Credit quality and nonaccrual loans improved in 2011 when compared to 2010, and we

anticipate this positive trend to continue. Asset quality, as measured by loans in the two

highest classifications, was 93.2 percent at December 31, 2011, a 0.7 percent improvement

compared to the same period last year.

Commodity Review and Outlook In general, agricultural conditions in our territory were positive for 2011, and with our diverse

commodity base, many of our customers benefited from strong prices and demand. However,

concern remains in some commodities that are still struggling during this period of slow

improvement in the U.S. economy. The following reflects conditions for key commodities and

products:

DAIRY: Northwest milk prices have declined with breakeven prices pressured by high hay

prices. Although stronger prices in 2010/2011 allowed many producers to recover from the

2008/2009 industry downturn, some producers are struggling to maintain a competitive cost

structure in the current market.

6

During 2011, 9.2 million milk cows produced 196.1 billion pounds of milk, reflecting a 1.7 percent

annual increase. Year-over-year milk cow numbers and production per cow were up 0.9 percent

and 0.8 percent respectively. Milk production in 2012 is forecast to increase to 198.5 billion

pounds.

FOREST PRODUCTS: Log prices have experienced a strong recovery since 2009, especially

in the Pacific Northwest’s coastal regions, where ports facilitated exports of logs to China. The

outlook for 2012 softwood log and lumber is for volatility as prices declined in the fourth quarter of

2011. Although China is expected to continue to demand wood fiber due to the resource gap

between its domestic resources and actual log consumption, log exports will be pressured down by

lower Chinese demand.

Domestically, demand for logs, lumber, and panels are expected to remain generally weak. New

home construction remains flat and home prices continue to decline due to a large inventory of

existing homes for sale and homes moving toward foreclosure. The overhang of existing homes

and estimated time to absorb this inventory are expected to push a recovery in housing starts to

late 2014.

APPLES: Overall fruit size is down this year, but quality has been good. Some apples were

damaged by cold weather this past fall and will not store well. Other conditions have affected this

year’s crop in some locations. Water core, a disorder that degrades and discolors internal fruit

tissue, affected some apple varieties. However, overall pack-outs have been good and it appears

that more apples made it to storage than expected despite the late harvest, cold weather, and

picker shortage.

The 2011/2012 total crop yield is fairly small by the standard of the previous two years’ crops.

Some warehouses are concerned they won’t have enough fruit to make it through the summer and

are beginning to control movement accordingly. Crop movement is strong in both the domestic

and export markets, despite harvest delays. Season-to-date average prices are above $23 per box

for the 2011/2012 crop compared to more than $20 last year and prices above $18 per box for

2009/2010.

The small crop, good prices, and strong movement suggest that growers can generally expect

strong returns for their 2011 crop. Given the amount of smaller fruit in the marketplace this year,

target size fruit is expected to enjoy price differentiation in the market. The positive outlook for the

2011/2012 crop is supported by robust domestic and export demand evident in the marketplace.

CATTLE: The cattle market is strong and prices are record setting at the close of the marketing

year for the 2011 calf crop. The strong fed cattle market and reduced cow numbers have spurred

calf and feeder prices well above historical levels. Current calf and feeder prices are strong.

Replacement cow and heifer numbers continue to decline in the U.S. and other cattle exporting

countries, keeping pressure on supply and indicating higher cattle prices in 2012.

The latest USDA forecast for 2012 shows a continuing increase in red meat exports, despite lower

U.S. beef production. This is a result of higher unit values and a stronger demand from major

markets, particularly Asia. The USDA is forecasting lower imports in 2012, as limited supplies will

be subject to demand from other countries. International export markets will continue to be a

critical component of U.S. beef demand.

WHEAT: Most wheat producers are well positioned entering 2012. Strong yields, early

marketing, and prudent use of crop insurance support solid 2011 results. The 2011/2012 season-

average price received by farmers is projected to range from $7.05 to $7.55 per bushel. Although

wheat prices are currently lower, season-average wheat prices are supported by early-season

marketing and forward sales.

Winter wheat crop conditions throughout the Northwest are average. Wheat crops in Eastern

Oregon, Eastern Washington, and Northern Idaho were sowed into favorable soil conditions,

providing a strong start to the new crop. In Montana, conditions were drier presenting farmers

tougher growing conditions.

Projected U.S. 2011/2012 wheat production of 2 billion bushels is 9.4 percent less than estimated

2010/2011 production and 9.9 percent less than 2009/2010 production. United States production

challenges included severe drought on the Central and Southern Plains and excessive moisture and

cool temperatures on the Northern Plains. Exceptions included white wheat and soft red wheat,

with production up in both from 2010/2011. Globally, wheat production and supply is projected at

new records in 2011/2012 based on higher projected wheat production and large carryover stocks

from the prior year.

POTATOES: Potato growers are optimistic entering 2012 due to strong potato markets, with

demand supporting prices above $8 per cwt. Prices are currently high for contracted and non-

contracted potatoes alike, but some growers are postponing sales hoping that less supply will

support even higher prices later in the season.

7

Potato production in Idaho, Washington, Oregon, and Montana was up 12 percent in 2011.

Overall, potato quality and size is excellent, although producers forced into an early harvest have

smaller potatoes and lower yields.

NURSERY: After three years of the toughest economic downturn in decades, many nursery

producers are guardedly optimistic about prospects for 2012 as the economy improves. Orders

through December are up from a year ago and at higher prices. Buyers are placing orders earlier in

view of perceived shortages of some plant varieties and concerns about access to quality plant

material. Whether or not orders actually materialize into cash sales depends upon spring weather

conditions and consumer demand.

Challenges facing most producers revolve around uncertainties in the market, higher operating

costs, labor shortages and consumer confidence to support plant sales. Cash flow challenges still

impact most producers who depleted liquidity due to losses the past few years.

HAY: Hay supplies are at historically tight levels in the Northwest. It’s expected that nearly all of

the alfalfa stocks in the region are committed and nearly all have been paid for as buyers locked-in

supplies earlier in the season.

Overall, hay quality in the Northwest is down from historical levels, but market demand remains.

The narrow price spread between fair and premium quality alfalfa in the region incentivized

growers to focus production on yield rather than quality this year. Average year-over-year alfalfa

prices for Idaho, Oregon, and Washington are up 85.8, 67.8, and 84.6 percent respectively

according to data from the National Agricultural Statistics Service.

The market for export hay in the Northwest remains strong with hay exports up 14.2 percent year-

over-year. Lower transportation costs and favorable exchange rates have given a competitive edge

to foreign buyers looking to purchase hay.

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

Total loans and accrued interest outstanding were $8.36 billion at December 31, 2011, and

remained relatively unchanged when compared to the prior year. In 2011, overall slow growth in

the U.S. economy has made finding new lending opportunities in the current economic

environment challenging. Many producers took a conservative approach to operating their

business, demonstrating a greater focus on debt reduction and positioning capital versus investing

in new assets or growing their business.

The following table reflects activity within the nonaccrual loan portfolio:

As of December 31, 2011, nonaccrual loans that were current as to principal and interest

installments totaled $178,298 representing 73.4 percent of the nonaccrual loan portfolio compared

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

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

8

Allowance for Credit Losses The allowance for credit losses is comprised of the allowance for loan losses 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

upon. Factors such as the likelihood of disbursements and the likelihood of losses given

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

on the balance sheet and totaled $12,000 at December 31, 2011 and $7,000 at both December 31,

2010, and 2009.

The allowance for loan losses (AFLL) increased $15,500 from $111,000 at December 31, 2010 to

$126,500 at December 31, 2011. The allowance for loan losses increased $15,000 from $96,000 at

December 31, 2009, to $111,000 at December 31, 2010. Specific loan loss reserves at December

31, 2011, 2010, and 2009 totaled $31,679, $32,380, and $52,270, respectively. At December 31,

2011, this reserve is primarily comprised of those agricultural sectors that continue to be impacted

by volatility in commodity and input prices, such as dairy, as well as those industries, such as

nursery, that are impacted by the overall downturn in the U.S. economy.

Coverage of the AFLL, 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, 2011, was $159,156, compared to $150,064 for

2010 and $106,085 for 2009. The following table provides detail of changes in the components of

our net income:

Net Interest Income: 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.

These same factors contributed to the $16,610 increase in net interest income in 2010 compared

to 2009.

9

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, 2011, and

2010, and between the years ended December 31, 2010, and 2009, are presented in the following

table:

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

portfolio during 2011, 2010, and 2009 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 has led to higher allowance

levels and provisions for credit losses have 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. Charge-offs net of recoveries totaled $26,841,

$48,056, and $31,381 in 2011, 2010, and 2009, respectively. Given the size of our portfolio, these

credit losses have remained relatively small.

Noninterest income: The decrease in noninterest income of $8,309 in 2011 when compared to

2010 was primarily due to $9,312 in refunds received in 2010 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 2.0 percent secure base amount,

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

System banks and may refund excess amounts. The Insurance Fund ended 2009 above the secure

base amount, and consequently in the first quarter of 2010, the Insurance Corporation distributed

to Farm Credit entities the excess amount generated in 2009, as well as excess amounts from

2003. In 2011, no similar refunds were received.

Operating expense: In 2011, operating expenses increased $4,464 when compared to 2010.

Factors contributing to this increase when compared to the previous year were increases in

purchased services, furniture and equipment, salaries, and other expenses. Purchased services

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. Other expense

increased over the prior year due primarily to a contingent liability of $2,000 related to state taxes.

These expenses were partially offset by a decrease in employee benefits due primarily to a

decrease in amortization of past actuarial plan losses on the defined benefit plan.

Operating expenses decreased by $7,185 in 2010 compared to 2009. The decrease resulted from

reduced insurance premium assessment rates on the Insurance Fund and a decrease in employee

benefits. The decrease in employee benefits was primarily due to a reduction in net period benefit

costs on the defined benefit pension plan. These positive variances were slightly offset by higher

expenses in salaries, purchased services and public and member relations. The increase in salaries

was primarily due to additional employees.

Other noninterest expense: Noninterest expense increased $4,648 in 2011 when compared to

2010. The majority of this increase was attributed to losses related to other property owned. In

2011, carrying values were reduced on several assets held in other property owned and losses

recognized on properties sold throughout the year. In 2009 or 2010, no significant carrying value

adjustments were recorded.

10

Provision for income taxes: Income tax expense was $3,064 higher than in the previous year

primarily due to increased non-patronage sourced income from our taxable entity and adjustments

to our net deferred tax asset. These same reasons contributed to the income tax expense increase

of $5,588 in 2010 when compared to 2009.

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 and is collateralized by a pledge of substantially all of our assets

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

financial and credit metrics that if not maintained can result in increases to our funding costs. The

general financing agreement also requires us to comply with Farm Credit Administration

regulations regarding liquidity. To meet this requirement, we are allocated a share of CoBank’s

liquid assets. We are currently in compliance with the general financing agreement and do not

foresee significant issues with obtaining funding or maintaining liquidity.

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

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

provide liquidity for disaster recovery or other emergency situations. At December 31, 2011, no

balance was outstanding on this line of credit. Additionally, we have a letter of credit facility with

Bank of America to support letters of credit issued on Industrial Revenue Bonds. The total amount

available under this facility is $11,088, with $11,000 committed at December 31, 2011.

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

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

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 retained earnings 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, 2011. The

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

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

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

market value.

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 sensitivities. These limits are measured and reviewed by ALCO monthly

11

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 a parallel and

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

interest rate is less than 4 percent, then the downward shock is equal to one-half of the 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 2011, the 1 and 2 percent parallel and instantaneous downward shock scenarios

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

As of December 31, 2011, all interest rate risk-related measures were within approved policy

limits, general financing agreement requirements, and management guidelines.

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

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

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

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

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

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

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

diminish over time.

Total members’ equity increased $98,918 or 7.4 percent from December 31, 2010 to December 31,

2011. The increase in our capital was primarily due to earnings of $159,156 partially offset by

patronage payable of $53,264 and an increase in accumulated other comprehensive loss of

$7,006.

As displayed in the following table, at December 31, 2011, 2010, and 2009, 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 2012. See Note 8 to the Consolidated Financial Statements, “Members’ Equity” for further

discussions of these regulatory ratios.


Phil DiPofi

President and CEO

March 1, 2012

Tom Nakano

Executive VP-CFO

March 1, 2012

Kevin Riel

Chair of the Board

March 1, 2012

12


REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders

of Northwest Farm Credit Services

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

statements of income, of changes in members' equity and of cash flows present fairly, in all

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

(the Association) at December 31, 2011, 2010 and 2009, and the results of their operations and

their cash flows for each of the three years in the period ended December 31, 2011, 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, 2011, 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 assessment of the

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

over Financial Reporting appearing in the Association's 2011 Annual Report to Stockholders. Our

responsibility is to express an opinion on these financial statements and on the Association's

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

integrated audit in accordance with generally accepted auditing standards established by the

Auditing Standards Board (United States) and in accordance with the standards of the Public

Company Accounting Oversight Board (United States). Those standards require that we plan and

perform the integrated audit to obtain reasonable assurance about whether the financial

statements are free of material misstatement and whether effective internal control over financial

reporting was maintained in all material respects. Our integrated audit of the financial statements

included examining, on a test basis, evidence supporting the amounts and disclosures in the

financial statements, assessing the accounting principles used and significant estimates made by

management, and evaluating the overall financial statement presentation. Our integrated audit of

internal control over financial reporting included obtaining an understanding of internal control

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

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

Our integrated audit also included performing such other procedures as we considered necessary

in the circumstances. We believe that our integrated audit provided a reasonable basis for our

opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable

assurance regarding the reliability of financial reporting and the preparation of financial statements

for external purposes in accordance with generally accepted accounting principles. A company’s

internal control over financial reporting includes those policies and procedures that (i) pertain to

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

and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions

are recorded as necessary to permit preparation of financial statements in accordance with

generally accepted accounting principles, and that receipts and expenditures of the company are

being made only in accordance with authorizations of management and directors of the company;

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

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

financial statements.

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

detect misstatements. Also, projections of any evaluation of effectiveness to future periods are

subject to the risk that controls may become inadequate because of changes in conditions, or that

the degree of compliance with the policies or procedures may deteriorate.

March 1, 2012

13


Consolidated Balance Sheet (dollars in thousands)

December 31, 2011 2010 2009

ASSETS Cash $ 62,188 $ 47,229 $ 87,172

Loans 8,285,356 8,286,216 8,122,932

Less: allowance for loan losses 126,500 111,000 96,000

Net loans 8,158,856 8,175,216 8,026,932

Accrued interest receivable 75,071 76,959 79,795

Investment in and receivable from CoBank, ACB 309,141 306,931 304,254

Other property owned, net 6,211 9,562 524

Premises and equipment, net 9,602 11,392 10,256

Deferred tax asset, net 8,322 9,655 6,651

Other assets 67,356 68,486 63,860

Total assets $ 8,696,747 $ 8,705,430 $ 8,579,444

LIABILITIES

Note payable to CoBank, ACB $ 7,058,880 $ 7,216,962 $ 7,200,573

Advance conditional payments and other interest bearing liabilities 56,593 33,145 43,464

Accrued interest payable 28,706 31,443 37,609

Other liabilities 114,098 84,328 78,728

Total liabilities 7,258,277 7,365,878 7,360,374

Commitments and Contingent Liabilities (Note 14)

MEMBERS' EQUITY Capital stock and participation certificates 13,119 13,087 12,762

Accumulated other comprehensive loss, net of tax (30,052) (23,046) (29,097)

Unallocated retained earnings 1,455,403 1,349,511 1,235,405

Total members' equity 1,438,470 1,339,552 1,219,070

Total liabilities and members' equity $ 8,696,747 $ 8,705,430 $ 8,579,444

The accompanying notes are an integral part of these consolidated financial statements.

14


Consolidated Statement of Income (dollars in thousands)

For the year ended December 31, 2011 2010 2009

NET INTEREST INCOME

Interest income $ 406,091 $ 410,055 $ 412,705

Interest expense 144,784 162,610 181,870

Net interest income 261,307 247,445 230,835

Provision for credit losses 47,341 63,056 79,381

Net interest income after provision for credit losses 213,966 184,389 151,454

NONINTEREST INCOME

Patronage income 39,883 38,962 38,061

Financially related services 13,304 14,996 15,933

Loan and other fees 10,669 10,701 10,375

Other income 6,176 13,682 4,427

Total noninterest income 70,032 78,341 68,796

NONINTEREST EXPENSE

Salaries and employee benefits 64,079 65,449 64,807

Occupancy and equipment expense 10,958 10,036 9,920

Insurance fund premium 4,230 3,587 13,479

Other operating expenses 34,510 30,241 28,292

Other expense 4,765 117 19

Total noninterest expenses 118,542 109,430 116,517

Income before income taxes 165,456 153,300 103,733

Provision/(Benefit) for income taxes 6,300 3,236 (2,352)

Net income $ 159,156 $ 150,064 $ 106,085


15


Consolidated Statement of Changes in Members’ Equity (dollars in thousands)

Capital Stock

Accumulated Other Comprehensive Income/ (Loss)

Unallocated Retained Earnings

Total Members’

Equity

BALANCE AT DECEMBER 31, 2008 $ 12,410 $ (34,302) $ 1,155,351 $ 1,133,459

Comprehensive income: Net income 106,085 106,085 Other comprehensive income, net of taxes: Net change in cash flow hedge (60) (60) Amortization of costs included in net periodic pension cost and other actuarial adjustments net of deferred income tax 5,265 5,265 Total comprehensive income 111,290 Capital stock and participation certificates issued 1,311 1,311 Capital stock and participation certificates retired (959) (959) Patronage distribution (26,031) (26,031)


Comprehensive income: Net income 150,064 150,064 Other comprehensive income, net of taxes: Net change in cash flow hedge 497 497 Amortization of costs included in net periodic pension cost and other actuarial adjustments net of deferred income tax 5,554 5,554 Total comprehensive income 156,115 Capital stock and participation certificates issued 1,339 1,339 Capital stock and participation certificates retired (1,014) (1,014) Patronage distribution (35,958) (35,958)


Comprehensive income: Net income 159,156 159,156 Other comprehensive income, net of taxes: Net change in cash flow hedges (1,517) (1,517) Settlement gain included in net periodic pension income, net of deferred income tax (520) (520) Amortization of costs included in net periodic pension income, net of deferred income tax (4,969) (4,969) Total comprehensive income 152,150 Capital stock and participation certificates issued 1,222 1,222 Capital stock and participation certificates retired (1,190) (1,190) Patronage distribution (53,264) (53,264)



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Consolidated Statement of Cash Flows (dollars in thousands) Year ended December 31, 2011 2010 2009

Cash flows from operating activities: Net income $ 159,156 $ 150,064 $ 106,085 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 47,341 63,056 79,381 Depreciation/Amortization 4,920 3,278 3,497 Net loss on other property owned 4,263 37 134 Net gain on sales of assets (50) (282) (411) Changes in: Accrued interest receivable 1,888 2,836 4,535 Accrued interest payable (2,737) (6,166) (21,172) Deferred tax asset 1,333 (3,004) (3,976) Other assets 1,422 (7,606) (5,626) Other liabilities 1,678 312 7,409

Net cash provided by operating activities 219,214 202,525 169,856

Cash flows from investing activities: Increase in loans and notes receivable, net (38,822) (220,763) (272,279) Increase investment in CoBank, ACB - (680) (27,823) Fixed asset expenditures (1,810) (4,415) (3,638) Proceeds from sales of fixed assets 270 1,293 738 Proceeds from sales of other property owned 7,717 1,617 1,492

Net cash used in investing activities (32,645) (222,948) (301,510)

Cash flows from financing activities: Notes payable, net (158,082) 16,389 209,779 Increase/(Decrease) in advanced conditional payments 22,411 (10,456) (21,156) Other capital issued 1,222 1,339 1,311 Other capital retired (1,190) (1,014) (959) Distribution of patronage (35,971) (25,778) (31,115)

Net cash (used in)/provided by financing activities (171,610) (19,520) 157,860

Net increase/ (decrease) in cash 14,959 (39,943) 26,206

Cash at beginning of period 47,229 87,172 60,966

Cash at end of period $ 62,188 $ 47,229 $ 87,172

Supplemental schedule of non-cash investing and financing activities: Acquisition of other property owned $ 8,629 $ 10,692 $ 825 Net loan charge-offs 26,841 48,056 31,381 Premises acquired under capital lease 1,054 141 - Supplemental non-cash fair values changes related to hedging activities (Decrease)/Increase in interest rate cap and foreign currency hedge $ (1,517) $ 497 $ (60) Supplemental cash information: Interest paid $ 148,423 $ 169,823 $ 204,631 Income taxes paid 6,355 7,039 3,304 The accompanying notes are an integral part of these consolidated financial statements.

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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 called Northwest FCS) is a member-owned

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

customers/stockholders primarily in Washington, Oregon, Idaho, 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, 2011, the System was comprised

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

merger of CoBank, ACB and U.S. AgBank, FCB effective January 1, 2012, the nation is currently

served by three Farm Credit Banks and one Agricultural Credit Bank.

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

District. The Bank provides the majority of funding to associations within the District and is

responsible for supervising certain activities of the District Associations. The District consists of the

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

PCA. With the merger of CoBank and U.S. Agbank effective January 1, 2012, the District consists

of 27 ACA parent companies and two stand-alone FLCAs.

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 associations, owns Farm Credit Financial Partners, Inc.,

which provides technology and other operational services to its owners, and AgDirect, which

provides point of sale ag equipment financing.

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

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

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

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

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

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

debt obligations (Insured debt), (2) to ensure the retirement of protected borrower capital at par

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

discretionary uses by the Insurance Corporation of providing assistance to certain troubled System

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

has been required to pay premiums, which may be passed on to the associations, into the

Insurance Fund based on its annual average adjusted outstanding insured debt until the monies in

the Insurance Fund reach the “secure base amount”, which is defined in the Farm Credit Act as 2.0

percent of the aggregate insured obligations (adjusted to reflect the reduced risk on loans or

investments guaranteed by federal or state governments) or such other percentage of the

aggregate obligations as the Insurance Corporation in its sole discretion determines to be

actuarially sound. When the amount in the Insurance Fund exceeds the secure base amount, the

Insurance Corporation is required to reduce premiums, as necessary to maintain the Insurance

Fund at the secure base amount. As required by the Farm Credit Act, as amended, the Insurance

Corporation may return excess funds above the secure base amount to System institutions.

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 financial

management services.

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

Report to Stockholders, which includes the combined financial statements of CoBank and its

related associations. Northwest FCS’ financial condition may be impacted by factors that affect

CoBank. CoBank’s Annual Report to Stockholders discusses the material aspects of its financial

condition, changes in financial condition, and results of operations. In addition, the CoBank Annual

Report identifies favorable and unfavorable trends, significant events, uncertainties, and the

impact of activities of the Insurance Corporation. The lending and financial services offered by

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

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 financial statements and

accompanying notes. Significant estimates are discussed in these footnotes, as applicable. Actual

results may differ from these estimates.

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

financial statement presentation. 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 June 2011, the Financial Accounting Standards Board (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 current

option that permits the presentation of other comprehensive income in the statement of changes

in equity has been eliminated. 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:

• A single statement must present the components of net income and total net income, the

components of other comprehensive income and total other comprehensive income, and a

total for comprehensive income.

• In a two-statement approach, an entity must present the components of net income and total

net income in the first statement. That statement must be immediately followed by a financial

statement that presents the components of other comprehensive income, a total for other

comprehensive income, and a total for comprehensive income.

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 will not

impact financial condition or results of operations, but will result in changes to the presentation of

comprehensive income.

In May 2011, the FASB issued guidance entitled, “Fair Value Measurement – Amendments to

Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.”

The amendments change the wording used to describe the requirements in U.S. GAAP for

measuring fair value and for disclosing information about fair value measurements. The

amendments include the following:

1. Application of the highest and best use and valuation premise is only relevant when

measuring the fair value of nonfinancial assets (does not apply to financial assets and

liabilities.)

2. Aligning the fair value measurement of instruments classified within an entity’s shareholders’

equity with the guidance for liabilities. As a result, an entity should measure the fair value of

its own equity instruments from the perspective of a market participant that holds the

instruments as assets.

3. Clarifying that a reporting entity should disclose quantitative information about the

unobservable inputs used in a fair value measurement that is categorized within Level 3 of

the fair value hierarchy.

4. An exception to the requirement for measuring fair value when a reporting entity manages its

financial instruments on the basis of its net exposure, rather than its gross exposure, to those

risks.

5. Clarifying that the application of premiums and discounts in a fair value measurement is

related to the unit of account for the asset or liability being measured at fair value. Premiums

or discounts related to size as a characteristic of the entity’s holding (that is, a blockage

factor) instead of as a characteristic of the asset or liability (for example, a control premium),

are not permitted. A fair value measurement that is not a Level 1 measurement may include

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premiums or discounts other than blockage factors when market participants would

incorporate the premium or discount into the measurement at the level of the unit of account

specified in other guidance.

6. Expansion of the disclosures about fair value measurements. The most significant change will

require entities, for their recurring Level 3 fair value measurements, to disclose quantitative

information about unobservable inputs used, a description of the valuation processes used by

the entity, and a qualitative discussion about the sensitivity of the measurements. New

disclosures are required about the use of a nonfinancial asset measured or disclosed at fair

value if its use differs from its highest and best use. In addition, entities must report the level

in the fair value hierarchy of assets and liabilities not recorded at fair value but where fair

value is disclosed.

The amendments are to be applied prospectively. The amendments are effective during interim

and annual periods beginning after December 15, 2011. The adoption of this guidance will not

impact the Association’s financial condition or results of operations but will result in additional

disclosure requirements.

In January 2011, the FASB issued guidance entitled, “Deferral of the Effective Date of Disclosures

about Troubled Debt Restructurings.” This guidance temporarily delayed the effective date of the

disclosures about troubled debt restructurings required by the guidance previously issued on

“Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit

Losses.” The effective date of the new disclosures about troubled debt restructurings (TDR)

coincides with the guidance for determining what constitutes a TDR as described below.

In April 2011, the FASB issued its guidance entitled, “A Creditor’s Determination of Whether a

Restructuring is a Troubled Debt Restructuring,” which provides for clarification on whether a

restructuring constitutes a TDR. In evaluating whether a restructuring is a TDR, a creditor must

separately conclude that both of the following exists: (1) the restructuring constitutes a

concession, and (2) the debtor is experiencing financial difficulties. For nonpublic entities, the

guidance is effective for annual periods ending on or after December 15, 2012, including interim

periods within those annual periods. Northwest FCS elected to adopt the guidance effective for

periods ending on or before December 15, 2011. The adoption of this Standard did not have an

impact on the Bank and Associations financial condition or results of operations but did result in

additional disclosures.

CASH

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

banks.

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 can have original maturities ranging up to 40 years,

although the typical loan is 25 years or less. Substantially all short- and intermediate-term loans

for agricultural production or operating purposes 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. 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 (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

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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.

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

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

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

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

loans may be returned to accrual status when 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.

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.

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

system risk rating guidance that incorporates a 14-point risk-rating 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. 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.

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

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

through provisions for loan losses and loan recoveries and is decreased through reversals of

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 and imprecision. Changes in the agricultural

economy and their impact on borrower repayment capacity will cause these 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.

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' investment in CoBank is in the form of Class A 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

21

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

value less cost to sell 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 and carrying value adjustments are included in other income or other

expense, in 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 improvements are capitalized.

INTANGIBLE ASSETS

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

straight-line method over the estimated useful life of the intangible assets. The intangible assets

are reviewed annually for impairment with any impairment charges recognized in operating

expenses.

ADVANCED CONDITIONAL PAYMENTS

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

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

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

excess of the related loan balance are presented in the advance conditional payments and other

interest-bearing liabilities line in the accompanying Consolidated Balance Sheet. Advanced

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

EMPLOYEE BENEFIT PLANS

The employees of Northwest FCS participate in its defined benefit retirement plan or its defined

contribution retirement plan. Enrollment in the defined benefit 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 defined benefit retirement plan uses the “Entry

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

method for financial reporting purposes. Defined contribution retirement plan costs are expensed

as funded.

Employees who participate in the defined benefit plan also participate in the defined benefit

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

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

regulations subsequently issued would 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 defined benefit plan and the monthly retirement

benefit payment that would be payable to the participant under the defined benefit 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.

All employees of Northwest FCS are eligible to participate in its thrift/deferred compensation plan

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

contributions. Thrift Plan costs are expensed as funded.

INCOME TAXES

As previously described, Northwest Farm Credit Services, ACA operates through two wholly owned

subsidiaries. The Northwest Farm Credit Services, FLCA subsidiary is exempt from federal and

other income taxes as provided in the Farm Credit Act. 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.

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.

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

effect of temporary differences not allocated in patronage form. 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

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

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

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

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

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

earnings in the Bank, thereby indefinitely postponing their conversion to cash, or (2) 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

that 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 the accrual basis. CoBank

distributes patronage 100 percent in cash for its direct lending business. The 2011 requirement for

capitalizing its participation loans sold to CoBank is 8 percent of Northwest FCS’ prior ten-year

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

to participations sold, patronage from CoBank related to participations sold is paid 65 percent cash

and 35 percent Class A stock. The capital plan is evaluated annually by CoBank’s Board and

management and is subject to change.

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 forecasted transaction, changes in the fair value of the derivative will 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.

COMPREHENSIVE INCOME (LOSS)

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 generally accepted accounting principles are recorded as an

element of stockholders’ equity but are excluded from net income. Other comprehensive loss is

comprised of adjustments related to Northwest FCS’ defined benefit pension and retiree life plans

and to adjustments related to its derivative contracts used to manage interest rate and exchange

rate risk on assets.

FAIR VALUE MEASUREMENTS

The FASB 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 and liabilities include debt and

equity securities and derivative contracts that are traded in an active exchange market, as well as

certain U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that

are highly liquid and are actively traded in over-the-counter markets. Also included in Level 1 are

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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. This

category generally includes certain U.S. Government and agency mortgage-backed debt securities,

corporate debt securities, and derivative contracts. Pension plan assets that are derived from

observable inputs, including corporate bonds and mortgage-backed securities are reported in

Level 2.

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

significant to the fair value of the assets or liabilities are considered Level 3. These unobservable

inputs reflect the reporting entity’s own assumptions about assumptions that market participants

would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments

whose value is determined using pricing models, discounted cash flow methodologies, or similar

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

management judgment or estimation. This category generally includes certain private equity

investments, retained residual interests in securitizations, asset-backed securities, highly structured

or long-term derivative contracts, certain loans and other property owned. Pension plan assets

such as certain mortgage-backed securities that are supported by little or no market data in

determining the fair value are included in Level 3.

The fair value disclosures are presented in Note 10, Note 13, and Note 15.

OFF-BALANCE SHEET CREDIT EXPOSURES

Commitments to extend credit are agreements to lend to customers, generally having fixed

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

letters of credit are conditional commitments issued to guarantee the performance of a customer

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 Farm Credit Administration regulations. The following

table presents information regarding participations purchased and sold as of December 31, 2011:

24

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

shown in the following table. While the amounts represent Northwest FCS' maximum potential

credit risk as it relates to recorded loan principal, a substantial portion of Northwest FCS' lending

activities is collateralized and exposure to credit loss associated with lending activities is reduced

accordingly. An estimate of the credit risk exposure is considered in the determination of the

allowance for loan losses.

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, 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.

Loan volume by state at December 31 is as follows:

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

according to the contractual terms.

The following table presents information relating to impaired loans:

25

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

December 31, 2011, 2010, and 2009 totaled $15,023, $20,479, and $15,616, respectively.

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

follows:

One credit quality indicator utilized by the Bank and Associations is the Farm Credit Administration

Uniform Loan Classification System that categorizes loans into five categories. The categories are

defined as follows: • Acceptable – assets are expected to be fully collectible and represent the highest quality,

• Other assets especially mentioned (OAEM) – assets are currently collectible but exhibit some

potential weakness,

• 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.

26

The following table shows loans and related accrued interest classified under the Uniform Loan

Classification System as a percentage of total loans and related accrued interest receivable by loan

type as of December 31:

The following tables provide an aging analysis of past due loans and accrued interest as of

December 31:

Note: The recorded investment in the receivable is the face amount increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges, or acquisition costs and may also reflect a previous direct write-down of the investment.

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

legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it

would not otherwise consider.

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The following table presents additional information regarding troubled debt restructurings that

occurred during the year ended December 31, 2011:

Note: Pre-modification represents the recorded investment just prior to restructuring and post-modification represents the recorded investment immediately following the restructuring.

During 2011, troubled debt restructurings that occurred within the previous 12 months and for

which there was a subsequent payment default during the period totaled $3,283, all classified as

production and intermediate term.

Additional impaired loan information as of December 31, 2011 and 2010 is as follows:

Interest income on nonaccrual and accruing restructured loans that would have been recognized

under the original terms of the loans were as follows:

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A summary of the changes in the allowance for credit losses and the ending balance of loans and accrued interest outstanding as of December 31, 2011 and 2010 is as follows:

Allowance for Credit Losses: Real estate mortgage Production and

intermediate-term Agribusiness Rural residential

real estate Energy Communications Other Total Balance at January 1, 2011 $ 16,955 $ 80,549 $ 10,051 $ 2,569 $ 839 $ - $ 37 $ 111,000 Charge-offs (1,262) (24,130) (3,852) (2,244) - - - (31,488) Recoveries 9 4,638 - - - - - 4,647 Provision for loan losses 8,156 27,086 5,915 3,534 1,918 699 33 47,341 Transfers (to)from reserve for unfunded commitments (1,105) (3,214) (482) (141) (45) (8) (5) (5,000) Balance at December 31, 2011 $ 22,753 $ 84,929 $ 11,632 $ 3,718 $ 2,712 $ 691 $ 65 $ 126,500

Ending balance: Allowance individually evaluated for impairment $ 5,260 $ 23,916 $ 321 $ 2,182 $ - $ - $ - $ 31,679 Ending balance: Allowance collectively evaluated for impairment

17,493 61,013 11,311 1,536 2,712 691 65 94,821 Balance at December 31, 2011 $ 22,753 $ 84,929 $ 11,632 $ 3,718 $ 2,712 $ 691 $ 65 $ 126,500

Recorded Investments in Loans Outstanding: Ending balance: Loans individually evaluated for impairment $ 89,752 $ 135,649 $ 2,564 $ 14,873 $ 201 $ - $ - $ 243,039 Ending balance: Loans collectively evaluated for impairment

3,594,056 2,977,144 696,656 712,860 103,023 25,300 8,349 8,117,388 Total loans outstanding at December 31, 2011 $ 3,683,808 $ 3,112,793 $ 699,220 $ 727,733 $ 103,224 $ 25,300 $ 8,349 $ 8,360,427

Allowance for Credit Losses: Real estate mortgage Production and

intermediate-term Agribusiness Rural residential

real estate Energy Communications Other Total Balance at January 1, 2010 $ 8,544 $ 69,382 $ 7,970 $ 827 $ 9,261 $ - $ 16 $ 96,000 Charge-offs (681) (45,393) (2,023) (808) (6,465) - - (55,370) Recoveries 64 7,143 - 73 34 - - 7,314 Provision for loan losses 9,028 49,417 4,104 2,477 (1,991) - 21 63,056 Transfers (to)from reserve for unfunded commitments

- - - - - - - - Balance at December 31, 2010 $ 16,955 $ 80,549 $ 10,051 $ 2,569 $ 839 $ - $ 37 $ 111,000

Ending balance: Allowance individually evaluated for impairment $ 3,812 $ 26,437 $ 275 $ 1,856 $ - $ - $ - $ 32,380 Ending balance: Allowance collectively evaluated for impairment

13,143 54,112 9,776 713 839 - 37 78,620 Balance at December 31, 2010 $ 16,955 $ 80,549 $ 10,051 $ 2,569 $ 839 $ - $ 37 $ 111,000

Recorded Investments in Loans Outstanding: Ending balance: Loans individually evaluated for impairment $ 80,671 $ 172,093 $ 4,530 $ 13,863 $ 4,781 $ - $ - $ 275,938 Ending balance: Loans collectively evaluated for impairment

3,581,824 3,056,023 731,415 667,865 34,476 - 15,634 8,087,237 Total loans outstanding at December 31, 2010 $ 3,662,495 $ 3,228,116 $ 735,945 $ 681,728 $ 39,257 $ - $ 15,634 $ 8,363,175

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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, 2011, 2010, and 2009, were $0, $200, and

$0, respectively. The balance of the loans under the long-term standby commitments was $0,

$78,903, and $101,763 at December 31, 2011, 2010, and 2009, respectively. Fees for such

commitments totaled $864, $415, and $525 for the years ended December 31, 2011, 2010, and

2009, respectively. These amounts are classified as noninterest expense. 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.

During August 2007, Northwest FCS entered into a credit default swap with Mt. Spokane 2007-A

LLC (2007 LLC). The balance of the loans and accrued interest under the credit default swap was

$575,061, $663,426, and $757,824 at December 31, 2011, 2010, and 2009, respectively. Pursuant

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

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

covered interest and costs less any recoveries. However, the 2007 LLC is not required to pay

Northwest FCS until the Retained First Loss Notional Amount held by Northwest FCS is reduced to

zero. In addition to loss events, proportionate reductions in the Retained First Loss Notional

Amount will occur due to reductions of the Aggregate Notional Amount of the Reference

obligations associated with non-loss events such as repayment of loan principal. The balance of

the Retained First Loss Notional Amount at December 31, 2011, was $3,476. The credit default

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

maximum amount of losses the 2007 LLC will be required to pay under the credit default swap as

of December 31, 2011, is $22,588. As of December 31, 2011, $233 of losses have been incurred

by Northwest FCS. Northwest FCS capitalized costs at the establishment of the credit default swap

of $1,601. These capitalized costs are included in other assets and are amortized over the

expected remaining life of the loans under the agreement. Fees related to the credit default swap

are paid based on the volume of loans under the agreement over the life of the agreement. Fees

and the amortization of capitalized costs of $1,773, $2,009, and $2,145 for the years ended

December 31, 2011, 2010 and 2009, respectively, are classified as noninterest expense.

During June 2004, Northwest FCS entered into a credit default swap with Mt. Spokane 2004-A LLC

(2004 LLC). The balance of the loans under the credit default swap was $194,356, $243,944, and

$293,446 at December 31, 2011, 2010, and 2009, respectively. Pursuant to the credit default

swap, following the occurrence of a known loss, the 2004 LLC will be required to pay an amount to

Northwest FCS equal to the principal amount of the defaulted loan plus covered interest and costs

less any recoveries. The credit default swap agreement will remain in place over the life of the

loans under the credit default swap. The maximum amount of losses the 2004 LLC will be required

to pay under the credit default swap as of December 31, 2011, is $17,933. As of December 31,

2011, $259 of losses have been incurred by the 2004 LLC. Northwest FCS capitalized costs at the

establishment of the credit default swap of $2,318. These capitalized costs are included in other

assets and are amortized over the expected remaining life of the loans under the agreement. Fees

related to the credit default swap are paid based on the volume of loans under the agreement over

the life of the agreement. Fees and the amortization of capitalized costs of $812, $996, and $1,298

for the years ended December 31, 2011, 2010, and 2009, respectively, are classified as noninterest

expense.

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

(Trust). The balance of the loans under the credit default swap was $71,356, $93,869, and

$120,931 at December 31, 2011, 2010, and 2009, respectively. Pursuant to the credit default

swap, following the occurrence of a known loss, the Trust will be required to pay an amount to

Northwest FCS equal to the principal amount of the defaulted loan plus covered interest less any

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

the credit default swap. The maximum amount the Trust will be required to pay under the credit

default swap as of December 31, 2011, is $6,646. As of December 31, 2011, $26 of losses have

been incurred by the Trust. Northwest FCS capitalized costs at the establishment of the credit

default swap of $2,618. These capitalized costs are included in other assets and are amortized

over the expected remaining life of the loans under the agreement. Fees related to the credit

default swap are paid based on the volume of loans under the agreement over the life of the

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agreement. Fees and the amortization of capitalized costs of $382, $488, and $602 for the years

ended December 31, 2011, 2010, and 2009, respectively, are classified as noninterest expense.

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

Bank of America to acquire eligible securities, which will be used as collateral to secure the Failure

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, 2011, 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 for two purposes.

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

CoBank. The current requirement for capitalizing its direct loan from CoBank is 4 percent of

Northwest FCS’ prior year average borrowings. If the actual stock investment exceeds the required

stock investment, then CoBank compensates Northwest FCS for any excess stock invested. If the

actual stock investment is less than the required stock investment, then Northwest FCS is required

to purchase the shortfall amount. CoBank distributes patronage for its direct lending business 100

percent in cash. The 2011 requirement for capitalizing its patronage-based participation loans sold

to CoBank is 8 percent of Northwest FCS’ prior ten-year average balance of such participations sold

to CoBank. Under the current CoBank capital plan applicable to such participations sold, patronage

from CoBank related to these participations sold is paid 65 percent cash and 35 percent Class A

stock. The capital plan is evaluated annually by CoBank’s board and management and is subject to

change.

The investment in CoBank is carried at cost plus allocated equity in the accompanying

Consolidated Balance Sheet. Estimating the fair value of Northwest FCS’ investment in CoBank is

not practicable because the stock is not traded. The Association owns approximately 19 percent of

the issued stock of CoBank as of December 31, 2011. As of that date, CoBank’s assets totaled

$63.3 billion and members’ equity totaled $4.9 billion. CoBank’s earnings were $707 million during

2011.

Patronage income received from CoBank is recorded on the accrual basis based on estimated

amounts. The difference between the estimated accrual and the actual patronage received is

reflected in noninterest income in the year received. Northwest FCS recognized patronage income

of $38,077, $37,454, and $36,868 for the years ended December 31, 2011, 2010, and 2009,

respectively.

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

Directors. The target level for associations in 2011 for funds borrowed is within the range of 4-6

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

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

average balance of participations sold to CoBank as specified in the Bylaws (currently 8 percent).

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 equitable.

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NOTE 5 > Premises and Equipment

Premises and equipment consist of the following:

Northwest FCS is obligated under various noncancellable operating leases. Certain office space and

equipment are leased. Rental expense under these noncancellable operating leases was $6,352,

$6,297, and $5,991 for the years ended December 31, 2011, 2010, and 2009, respectively. At

December 31, 2011, future minimum lease payments for all noncancellable leases are as follows:

NOTE 6 > Other Property Owned

Net losses on other property owned consist of the following:

NOTE 7 > Note Payable to CoBank, ACB

Through the direct note to the bank, Northwest FCS is liable for the following:

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

portfolio. Under terms of a financing agreement with CoBank, which provides Northwest FCS an

open-end revolving line of credit and other term structures, loans made by Northwest FCS, as well

as substantially all of its assets, are assigned to CoBank as primary collateral for funds advanced

by CoBank. Each debt obligation has its own term and rate structure. The weighted average

interest rate for all debt was 1.94, 2.08, and 2.32 percent at December 31, 2011, 2010, and 2009,

respectively.

Fixed rate debt and floating rate debt typically have original maturities ranging from 1 to 30 years.

Discount notes have maturities from one day to 365 days. The revolving line of credit is renewed

annually and is priced at overnight funds.

The maturities of debt within the direct note to the Bank as of December 31, 2011 are shown

below:

At December 31, 2011, callable debt was $745,000, with a range of call dates between January

2012 and June 2015.

32

Under the Farm Credit Act, Northwest FCS is obligated to borrow only from CoBank, unless CoBank

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, 2011, Northwest FCS’

note payable is within the specified limitations.

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

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

provide liquidity for disaster recovery or other emergency situations. At December 31, 2011, no

balance was outstanding on this line of credit. Additionally, we have a letter of credit facility with

Bank of America to support letters of credit issued on Industrial Revenue Bonds. The total amount

available under this facility is $11,088, with $11,000 committed at December 31, 2011.

NOTE 8 > Members’ Equity

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

capitalization requirements and restrictions, and equities are provided next.

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. 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. An

initial investment, Class A capital stock (in the case of mortgage or agricultural loans) or

participation certificates (PCs) (in the case of consumer or farm-related business loans), of the

lesser of 2 percent of the loan amount or one thousand dollars per customer is currently required

for new loans. 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.

Each owner or joint owner of Northwest FCS at-risk Class A voting common stock is entitled to a

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

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

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

investment. The aggregate par value of the stock is added to the principal amount of the related

loan obligation. Northwest FCS retains a first lien on common stock or participation certificates

owned by its borrowers.

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,

2011, Northwest FCS had no remaining protected borrower stock outstanding, as the previous $1

balance was retired during the year.

REGULATORY CAPITALIZATION REQUIREMENTS AND RESTRICTIONS

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

percent of risk-adjusted assets and off-balance sheet commitments. Failure to meet the 7 percent

capital requirement can initiate certain mandatory and possibly additional discretionary actions by

the FCA that, if undertaken, could have a direct material effect on Northwest FCS’ 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 achieved. These

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

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

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

capital, core surplus, and total surplus ratios at December 31, 2011, were 13.8 percent, 13.7

percent, and 13.7 percent, respectively. Management is not aware of any reasons why Northwest

FCS’ regulatory capital requirements would not be met in 2012.

An FCA regulation empowers it to direct a transfer of funds or equities by one or more System

institutions to another System institution under specified circumstances. Northwest FCS has not

33

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

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 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 have all been 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, 2011, there were 2,538,687 shares outstanding with a total par

value of $12,693.

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, 2011, there were 85,052 units outstanding with a total par

value of $425.

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

at par value. At December 31, 2011, there were no units outstanding.

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

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

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

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

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

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

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

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

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

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

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

would continue to be retired at par or face value.

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, 2011, 2010, and 2009, the

Board approved cash patronage distributions of $53,264, $35,958, and $26,031, respectively.

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

difference between the estimated accrual and the actual patronage distribution is reflected in

retained earnings in the year paid. In December 2011, the Board of Directors of Northwest FCS

approved a program to distribute a patronage dividend to its stockholders. The patronage dividend

will be declared and accrued in 2012 and paid in 2013.

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

retained as unallocated retained earnings. At December 31, 2011, all accumulated earnings are

retained as unallocated retained earnings.

OTHER ACCUMULATED COMPREHENSIVE INCOME (LOSS)

Northwest FCS reports accumulated other comprehensive income (loss) as a component of

retained earnings, which is reported net of taxes as follows:

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NOTE 9 > 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:

Northwest FCS recorded a valuation allowance of $25,139, $22,908, and $19,814 during 2011,

2010, and 2009, respectively. Northwest FCS will continue to evaluate the realizability of the

deferred tax assets and adjust the valuation allowance accordingly.

The calculation of tax assets and liabilities involves management estimates and assumptions as to

the future taxable earnings. The expected future tax rates are based upon enacted tax laws.

Northwest FCS had no uncertain income tax positions to be recognized for the years ended

December 31, 2011, 2010, and 2009, respectively.

Tax years that remain open for federal and state income tax jurisdictions are 2008 and forward.

NOTE 10 > Employee Benefit Plans

Northwest FCS currently has a defined benefit pension plan and a defined contribution retirement

plan. All employees of Northwest FCS are covered under one of the plans. Northwest FCS also has

a defined benefit restoration plan, which covers certain participants in the defined benefit plan.

The Northwest FCS defined benefit pension plan was closed to new participants beginning January

1, 1995. The defined benefit pension plan is noncontributory. Benefits under the defined benefit

35

pension plan are based on salary and years of service. The following tables set forth the

obligations and funded status of Northwest FCS’ defined benefit pension plan.

The funding status and the amounts recognized in the Consolidated Balance Sheet of Northwest

FCS for post-retirement benefit plans follows:

The 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:

36

The estimated net loss and prior service cost for the defined benefit pension plan that will be

amortized from accumulated other comprehensive income into net periodic benefit cost in 2012 is

$1,435 and $290, 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, called the Farm Credit

Foundations Trust Committee, comprised of certain members of senior management of the

participating employers, supervises the investment assets of the plans on behalf of the employers.

The Trustees adopts an asset allocation strategy for each plan that reflects return and risk

objectives, plan liabilities, and other factors.

The Trustees employ a total return investment approach whereby a mix of equities and fixed

income investments are used to maximize the long-term return of plan assets for a prudent level

of risk. The intent of this strategy is to minimize plan expenses by outperforming plan liabilities

over the long run. Risk tolerance is established through careful consideration of plan liabilities, plan

funded status, and the participating 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.

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 was a target of 70% of

assets in equity securities, 25% in debt securities and 5% in real estate during 2011. The asset

allocation policy of the pension plan for 2012 was changed to a target of 60% of assets in equity

securities, 35% in debt securities and 5% in real estate.

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

Plan Sponsor Committee with input from the Trust Committee. The Plan Sponsor Committee is

comprised of certain members of senior management and boards of directors of the participating

employers. Historical return information to establish a best-estimate range for each asset class in

which the plan is invested. The most appropriate rate is selected from the best-estimate range,

taking into consideration the duration of plan benefit liabilities and plan sponsor investment

policies.

37

The fair values of Northwest FCS’ pension plan assets at December 31, 2011 by asset category are

as follows:

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

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 we have

the ability to redeem 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 we do not have the ability to redeem at NAV per share at the measurement date

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

The following benefit payments, which reflect expected future service, as appropriate, are

expected to be paid:

Northwest FCS is expected to contribute $0 to its defined benefit plans in 2012.

Employees who do not participate in the defined benefit pension plan participate in the defined

contribution retirement plan, which is in accordance with Section 401 of the Internal Revenue

Code. The plan requires the employer to contribute three percent of eligible employee

compensation for all employees. For eligible employees hired prior to January 1, 2007, an

additional 2 percent of compensation in excess of the employee eligible base compensation is

contributed into the plan each year. Defined contribution retirement plan expense recorded by

Northwest FCS was $1,486, $1,325, and $1,225 in 2011, 2010, and 2009, respectively.

All Northwest FCS employees may also participate in a salary deferral plan. For employees

participating in the defined benefit plan, the salary deferral plan requires Northwest FCS to match

employee contributions up to a maximum of 100 percent of the employees’ first 2 percent of salary

and 50 percent on the next 4 percent of salary. For employees participating in the defined

contribution plan, the salary deferral plan requires Northwest FCS to match employee contributions

up to a maximum of 100 percent on the employees’ first 6 percent of salary. Employer

contributions to the salary deferral plan were $2,182, $2,399, and $2,243 for the years ended

December 31, 2011, 2010, and 2009, respectively.

The senior officer compensation package, as administered by the Board Compensation Committee,

includes a long-term incentive/retention program designed to retain senior management and

incent them for achieving certain specified personal and corporate goals. Northwest FCS has

38

established a Rabbi Trust for this plan and therefore accrues for the estimated liability and also

records an asset for contributions to cover estimated costs.

NOTE 11 > 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.

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

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

made on the same terms, including interest rates and collateral, as those prevailing at the time for

comparable transactions with unrelated borrowers.

Total loans to directors, their immediate families, and other organizations with which they are

associated at December 31, 2011, amounted to $10,667. During 2011, disbursements of $16,210

were made and repayments totaled $16,412. In the opinion of management, none of these loans

outstanding at December 31, 2011 involved more than a normal risk of collectability.

Northwest FCS also recognized $38,077, $37,454, and $36,868 of equity distributions from CoBank

for the years ended December 31, 2011, 2010, and 2009, respectively. Northwest FCS owned

approximately 19 percent of the outstanding common stock of CoBank at December 31, 2011.

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

also sells loan participations to CoBank. At December 31, 2011, Northwest FCS had sold

participation interests to CoBank totaling $675,104 and had purchased loan participation interests

from CoBank totaling $642,493.

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

four participated loans. As of December 31, 2011, there was one remaining loan with an

outstanding balance, which totaled $5,743. $757 of unfunded commitments were available for this

loan at December 31, 2011. Pursuant to the terms of the transaction, Northwest FCS guaranteed

collection of 20 percent of the outstanding balance of the loans over their respective remaining

terms.

At December 31, 2011, Northwest FCS’ owned approximately 15 percent of Farm Credit Financial

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

information technology solutions for various Farm Credit associations including Northwest FCS.

At December 31, 2011, Northwest FCS’ owned approximately 6 percent of AgDirect, LLP. AgDirect,

LLP provides equipment dealer financing products and is jointly owned by several Farm Credit

System entities.

NOTE 12 > Regulatory Enforcement Matters

No FCA regulatory enforcement actions currently exist with respect to Northwest FCS.

NOTE 13 > 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, 2011, 2010, and

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

39

The table below represents reconciliations of all Level 3 liabilities measured at fair value on a

recurring basis for the years ended December 31, 2011, 2010, and 2009.

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, 2011, 2010,

and 2009 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

40

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 14 > 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 borrowers and to manage their exposure to interest-rate risk. These financial

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

instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized

in the financial statements. Commitments to extend credit are agreements to lend to a borrower 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, 2011, $3,364,852 of commitments to

extend credit and $21,458 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 balance sheet of

Northwest FCS. At December 31, 2011, $72,569 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, 2011 and $7,000 at both December 31, 2010

and 2009.

During 2011, Northwest FCS recorded a contingent liability of $2,000 related to Washington state

taxes. Northwest FCS reported the issue to the state and has initiated managed audit proceedings

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 15 > 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.

41

The next table presents the carrying amounts and estimated fair values of Northwest FCS’ financial

instruments at December 31, 2011, 2010, and 2009:

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:

CASH

The carrying value is a reasonable estimate of fair value.

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 13, 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.

42

NOTE 16 > 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 such unrealized appreciation or depreciation is expected to be

substantially offset by gains and losses on the derivative instruments that are linked to these

assets and liabilities. Interest rate and foreign exchange fluctuations also cause interest income

and interest expense of variable-rate assets and liabilities to increase or decrease. The effect of

this variability in earnings is expected to be substantially offset by gains and losses on the

derivative instruments that are linked to these 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.

Northwest FCS records derivatives as assets or liabilities at their fair value on the consolidated

balance sheet. Northwest FCS records changes in the fair value of a derivative 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 cash-flow hedge transactions, in

which Northwest FCS hedges the variability of future cash flows related to a variable-rate asset or

liability, changes in the fair value of the derivative are reported in accumulated other

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

in accumulated other comprehensive income/(loss) will be reclassified as earnings in the periods in

which earnings are affected by the variability of the cash flows of the hedged item. The ineffective

portion of all hedges is recorded in current period earnings. Northwest FCS’ current hedging

activities consist of cash-flow hedges with no ineffectiveness.

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

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

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

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

therefore assumes no performance risk. Northwest FCS’ derivative activities are monitored by its

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

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

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

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

management strategies.

During 2010, Northwest FCS 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, 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.

As of December 31, 2011, Northwest FCS recorded a derivative liability of $293 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, 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. The fair value at December 31, 2009, was a

derivative liability of $176 with a corresponding offset to accumulated other comprehensive loss

adjusted in accordance with accounting guidance on foreign currency translation.

43

NOTE 17 > Quarterly Financial Information (Unaudited)

Quarterly results of operations for the years ended December 31, 2011, 2010, and 2009 follow:

Net income during the first quarter of 2011 was relatively consistent compared to the third and

fourth quarters, as lower net interest income was offset by lower-than-average noninterest

expenses during the quarter. During the second quarter, a significantly higher-than-average

provision for credit losses was the primary factor causing net income to be lower than in the other

three quarters. Quarterly net income was greatest in the third quarter, as positive trends in net

interest income continued, along with a reduced provision for income taxes, which were partially

offset by increased salaries and benefits expenses. Net income in the fourth quarter followed

trend, as net interest income was similar to that in the third quarter along with increased fee and

patronage income. Such increases were offset by increased incentive compensation accruals and

the contingent liability accrual discussed in Note 14.

Net income during the first quarter of 2010 was higher as compared to the second and fourth

quarters largely as a result of an excess refund paid to Northwest FCS by the Farm Credit System

Insurance Corporation relating to the Farm Credit Insurance Fund. This item was partially offset by

a higher-than-average provision for credit losses. During the second quarter, net interest income

after provision for credit losses increased as net interest income increased from the first quarter,

and the provision for credit losses trended down toward the quarterly average for the year. Third

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

average provision for credit losses. Net income for the fourth quarter was lower when compared to

the previous three quarters. A continued increase in net interest income and strong financially

related services income were more than offset by a higher-than-average provision for credit losses,

increased compensation expenses attributable to year-end bonus programs, and higher public

relations and other expenses.

Net income was lower in the first quarter of 2009, when compared to the remaining three

quarters, due to lower levels of net interest income, a significant provision for loan losses, a higher

than normal income tax expense and a lower level of miscellaneous income. Net income was lower

in the second quarter of 2009, when compared to the remaining two quarters, due to lower levels

of net interest income, another significant provision for loan losses, and lower levels of income

attributable to financially related services. A decrease in income tax expense partially offset the

negative impact of the above items. Net income was lower in the third quarter, when compared to

the fourth quarter, due to a higher provision for loan losses, which was partially offset by a

reduction in income tax expense. Net income for the fourth quarter, while significantly higher than

previous quarters, was negatively impacted by a provision for loan losses, an increase in salary and

benefit expenses primarily due to various year-end bonus programs. These amounts were partially

offset by higher income attributable to financially related services income and an income tax

benefit.

Northwest FCS’ 2011 Quarterly Reports to Stockholders are available free of charge on request by

contacting Northwest Farm Credit Services, ACA, P.O. Box 2515, Spokane Washington 99220-2515

or telephone (509) 340-5300. Northwest FCS’ 2011 Quarterly Reports to Stockholders are also

available free of charge at any office location or on the internet at www.farm-credit.com. The 2012

Quarterly Reports to Stockholders will be available on approximately May 10, 2012, August 10,

2012, and November 9, 2012.

NOTE 18 > Subsequent Event

Northwest FCS has evaluated subsequent events through March 1, 2012, which is the date the

financial statements were issued or available to be issued.

44


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 14 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, 9, 10, 14, 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 at Northwest FCS is comprised of 14 director positions. Eleven directors are

elected by the voting membership. Each represents one of eleven geographic regions that

comprise Northwest FCS’ operating territory. Three directors are appointed by the other members

of the Board. Two of these appointed directors are Outside Directors who cannot be customers,

stockholders, employees or agents of any Farm Credit Institution. One of these Outside Directors is

designated as a “financial expert” as defined by FCA Regulation. This director brings not only

independence but also financial, accounting, and audit expertise to the Board and chairs the

Board’s Audit Committee. The other Outside Director position is used to bring independence, an

outside perspective and other areas of expertise to enhance Board oversight capabilities. Currently,

both Outside Directors qualify as financial experts and one acts as an alternate to the designated

“financial expert.” The third appointed director position is a stockholder and 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

several modules of core curriculum offered as part of a new director orientation program. This

program is intended to develop an understanding of the roles and responsibilities of a director as

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

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

Credit System and non-System meetings, seminars, and conferences. This balance of training

assures not only an understanding of the Farm Credit System, but also exposes Board members to

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

Northwest FCS’ operations against those of other successful lenders.

The Board is independent of management. The CEO and internal auditor report to the Board and

no management or employees may serve as directors. The Board generally has six regularly

scheduled meetings each year, plus conference calls as needed between meetings. One of those

regularly scheduled meetings is conducted as a comprehensive three-day strategic planning

45

session. The Board has established six committees to provide concentrated focus and expertise in

particular areas and to enhance the overall efficiency of scheduled Board meetings. All policies and

substantial contracts or new programs are generally reviewed by one of these committees, with

any actions recommended to the full Board for approval. Each committee created by the Board

prepares an Operating Statement outlining the purpose of the committee, its duties,

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. This committee structure consists of a Governance, Audit,

Compensation, Risk, Strategic Opportunities, and Reputation Committee. 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, Reputation, Audit, Risk, and Strategic Opportunities 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. 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 on this

committee and acts as the chair. 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.

The Audit Committee members are appointed by the Board. All members of the Audit Committee

are independent of management of Northwest FCS. The Audit Committee has unrestricted access

to representatives of the Internal Audit department, independent public accountants, and financial

management. Internal Audit department 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 at www.farm-credit.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 have any involvement 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

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under the terms of their compensation plan. The committee is also responsible for director

compensation and for oversight of Northwest FCS’ employees’ salary structure, benefit plans, all

Board policies applicable to those plans and other human resource matters not specifically

assigned to other committees.

R isk 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, operating expenses, funding, interest rate, liquidity, capital management as well as those

risks associated with its alliance partners and counterparties.

Strategic Opportunities 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 that the association’s overall strategic planning

processes serve as a foundation for those plans and for exploring and evaluating strategic

opportunities. This specifically includes evaluating potential benefits, risks and strategies for

considering opportunities such as emerging technologies, product development, joint ventures,

strategic alliances and mergers and acquisitions. 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.

Reputation Committee

This committee is responsible for matters impacting Northwest FCS’ image and reputation. This

includes marketing, legislative, public relations and community/industry involvement and activities.

The committee also provides oversight of the Local Advisory Committee Program. This committee

acts as a resource on matters primarily legislative and regulatory in nature, including monitoring

Northwest FCS’ lobby activities, developing recommended positions and legislative priorities and

reviewing requests for support for various legislative or regulatory initiatives.

Northwest FCS Directors

The following presents information regarding the directors of Northwest FCS, including their

business experience and any business in which they serve on the board of directors or as a senior

officer.

Rick Barnes – Callahan, California

Mr. Barnes was elected in 2010 and his term expires in 2015. He operates a cow-calf operation

with some timber and produces grass hay for the horse market. He is a director of Siskiyou

Resource Conservation District.

Christy Burmeister Smith – Newman Lake, Washington

Ms. Burmeister-Smith was appointed as an outside director in 2010 and her term expires in 2015.

She serves as Chair of the Audit Committee and is the designated “financial expert” on Northwest

FCS’ Board. Ms. Burmeister-Smith is Vice President-Controller & Principal Accounting Officer at

Avista Corp. in Spokane, Washington.

Drew Eggers – Meridian, Idaho

Mr. Eggers was re-elected in 2009 and his term expires in 2014. He serves as Chair of the

Strategic Opportunities Committee. Mr. Eggers raises peppermint, spearmint, sugar beets and

winter wheat. Mr. Eggers is Chairman of Leadership Idaho Agriculture Foundation and past

president of Food Producers of Idaho.

Jim Farmer – Nyssa, Oregon

Mr. Farmer was elected in 2010 and his term expires in 2015. He operates an irrigated row crop

farm and produces onions, wheat, field corn, and dry edible beans for seed. He is the

Secretary/Treasurer of Nyssa Rural Fire Protection District.

Mark Gehring – Salem, Oregon

Mr. Gehring was elected in 2010 and his term expires in 2015. He raises Marionberries,

blackberries and turf grasses for seed. He is Chairman of the Board of RS Growers, Inc. and

RainSweet, Inc., a Salem, Oregon fruit and vegetable processor.

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David Hedlin – Mt. Vernon, Washington

Mr. Hedlin was re-elected in 2011 and his term expires in 2016. He serves as Chair of the Risk

Committee. Mr. Hedlin raises vegetable seed, pickling cucumbers, pumpkins and wheat and serves

on the boards of Northwest Ag Research Foundation, Skagitonians to Preserve Farmland, Skagit

Valley Culinary Arts, Skagit County Farmland Legacy and is Commissioner of Skagit County Dike

District #9.

Herb Karst – Sunburst, Montana

Mr. Karst was elected in 2008 and his term expires in 2013. He is President of Karag, Inc., a

family-held corporation that produces wheat, barley, canola, and hay on a 4,300 acre farm. Mr.

Karst has served on the board of directors for both the National Barley Growers Association and

the National Association of Wheat Growers. He currently serves on the Board of the Farm Credit

Council which is the Farm Credit System trade association that handles legislative and regulatory

matters.

Ed Malesich – Dillon, Montana

Mr. Malesich was re-elected in 2007 and his term expires in 2012. He operates a commercial cow-

calf operation and raises wheat, malt barley, and alfalfa hay. Mr. Malesich is Vice Chairman of

Rocky Mountain Supply, a southwest Montana supply cooperative. He is also a new director on the

CHS Board of Directors.

Bruce Nelson – Spokane, Washington

Mr. Nelson was re-elected in 2009 and his term expires in 2014. He raises several varieties of

wheat, peas, lentils, barley and nursery trees. Mr. Nelson is past president of the Washington

Wheat Growers Association. In 2011 he served on the Farm Credit Council Board of Directors.

Dave Nisbet – Bay Center, Washington

Mr. Nisbet is a board appointed stockholder director. He was re-appointed by the board in 2011

and his term expires in 2017. He grows Pacific oysters and owns a shellfish processing plant. Mr.

Nisbet is a director of the Pacific Shellfish Institute, Advisory Board Member, Oregon State

University Coastal Oregon Marine Experiment Station-COMES, Executive Board Member OSU

Seafood Consumer Center, and member of the Pacific Coast Shellfish Growers Association.

Kevin Riel – Yakima, Washington

Mr. Riel was elected in 2007 and his term expires in 2012. He serves as Chair of the Board and

Governance Committee. Mr. Riel raises hops, apples, hay, and Concord grapes and is a member of

Knights of Columbus, fourth degree, was awarded International Order of the Hop, is a member of

National Grape Co-Op, Tree Top Co-Op and Farm Bureau. He is past Chair of the Washington State

Hop Commission and past president of the U.S. Hop Research Council. He currently is a board

member of Hop Growers of America.

Karen Schott – Broadview, Montana

Ms. Schott was re-elected in 2011 and her term expires in 2016. She serves as Vice Chair of the

Board. Ms. Schott raises winter wheat, spring wheat, and peas. She also manages a lease pasture

operation. Ms. Schott serves as Secretary of the family farming operation, Bar Four F Ranch, Inc.

She is also a member of the advisory committee to the Montana Southern Ag Research Station and

President of the Broadview Community Center Board.

Julie Shiflett – Spokane, Washington

Ms. Shiflett is an Outside Director appointed by the Board. She was appointed in 2008 and her

term expires in 2013. Ms. Shiflett serves as Chair of the Compensation Committee and has been

designated as the alternate to the designated “financial expert” on Northwest FCS’ Board. She is

the Executive Vice President and Chief Financial Officer for Red Lion Hotels and founding partner

of Northwest CFO, which assists emerging and mid-market companies to increase cash flow,

profitability, sales, and company value.

Shawn Walters – Newdale, Idaho

Mr. Walters was re-elected in 2011 and his term expires in 2016. He serves as Chair of the

Reputation Committee. Mr. Walters operates a family farm and fresh pack potato facility, grows

wheat, barley, alfalfa and potatoes. He serves on the Idaho Potato Commission and as a Director

of the Enterprise Canal.

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

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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 2011 was set at a rate of $47,305 per year for directors. The Board Chair

and Chair of the Audit Committee are paid $52,030. This represents an additional 10 percent,

which reflects their unique responsibilities and significant additional time demands of these two

positions. Director compensation paid annually to all directors was increased effective May 2011 by

$744 ($792 in the case of the Chair of the Board and the Chair of the Audit Committee). Each

director receives a monthly retainer of $3,942 and the Board Chair and Chair of the Audit

Committee receive a monthly retainer of $4,336. No additional per diem is paid for attendance at

Northwest FCS meetings or functions. If a director is not able to attend a regular monthly board

meeting, then the director only receives the monthly retainer if attendance at or performance of

other official business during that month warrant that payment.

Directors and senior officers are reimbursed for reasonable travel expenses and related expenses

while conducting association business. In addition, directors are allowed to be reimbursed

expenses related to their spouse attending the summer planning session, the December Board

meeting and one national meeting each year. Directors participating in the legislative fly-in to

Washington D.C. may be reimbursed spouse expenses for attending if their spouse participates in

the actual Congressional visits conducted during the fly-in. 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 2011 was $137,382 compared to $156,691* in 2010 and

$149,148* in 2009. The Board compensation policy is available and will be disclosed to

stockholders upon request.

*Prior period disclosures regarding director reimbursements were overstated. The FCA regulation regarding director reimbursements requires disclosure of the aggregate amount of reimbursement for travel, subsistence, and other related expenses for all directors as a group, for each of the last 3 fiscal years. Prior period disclosures included all director related expenses, as opposed to only those reimbursed to directors. Amounts previously disclosed included $326,611 and $309,960 for 2010 and 2009, respectively.

Information for each director for the year ended December 31, 2011, is as follows:

SENIOR OFFICERS

Several senior officers who served during 2009 and 2010 also served in that capacity for a brief

period in early 2011 as part of a transition team. However, for clarity, listed below with the CEO

are the ten senior officers of Northwest FCS who served throughout 2011, including two senior

officers who retired in 2011 and their replacements. 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). FPI is a technology firm providing technology support for Farm Credit institutions,

including Northwest FCS. He also serves on the Board of Second Harvest Food Bank in Spokane.

Jim Allen, Senior Vice President-Capital Markets

Mr. Allen has served as Senior Vice President-Capital Markets at Northwest FCS since its inception

in 1995. He served on the MEC in early 2011 during the management transition and was then 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.

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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.

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.

Joan Haynes, Executive Vice President-Corporate Administration

Ms. Haynes served as Executive Vice President-Corporate Administration since 1994. Prior to that,

she held various positions for Northwest FCS. Ms. Haynes retired effective March 31, 2011.

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

participating Farm Credit employers.

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 and in a lead position in the Human Resources department since 1992 and various other

positions since being hired in 1988.

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.

Dan Stainbrook, Executive Vice President-Agribusiness

Mr. Stainbrook has served as Executive Vice President-Agribusiness since July 2011. Prior to that

he served as Executive Vice President-Agribusiness and Capital Markets and Executive Vice

President-Credit since 1992.

Tom Tracy, Executive Vice President and General Counsel

Mr. Tracy served as Executive Vice President and General Counsel since 1989. Mr. Tracy previously

served on the Board of Governors of the Farm Credit System Captive Insurance Company. This

company offers, administers, and provides access to a broad range of insurance products to Farm

Credit entities on a captive basis. He serves on the Plan Sponsor Committee of the Farm Credit

Foundations Consolidated Benefit Plan. This committee oversees the plan design and non-fiduciary

responsibilities associated with the benefit plans offered by a number of Farm Credit employers.

Mr. Tracy also serves on the board of directors of the Spokane, YMCA. Mr. Tracy retired effective

April 30, 2011 and was replaced by Mr. Lavin.

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.

COMPENSATION OF CEO AND SENIOR OFFICERS

Executive Compensation - Summary

The Board’s Compensation Committee is responsible for the oversight of executive compensation,

including that of the CEO and senior officers. Compensation plans provide for the administration of

these senior officers’ base salaries based upon competitive industry survey data and provide

opportunities for them to earn both short-term incentive (STI) and long-term incentive (LTI)

awards. STI and LTI awards are based upon both the organization’s success and these

participants’ performance as measured by specific predetermined objectives and subjective

financial, operational and individual goals. The LTI portion is also designed to retain these key

executives. Under the current plan, the CEO and those senior officers who participate in the LTI

plan forfeit any unpaid LTI awards if they resign their position prior to the third year following that

for which the award was made.

The LTI awards to the CEO and senior officers, once made, are held in trust until they vest and are

paid. These funds are subject to market value fluctuations while held in trust and until actually

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paid. The participants bear the full risk of this market performance. The funds, until paid, are also

subject to the claims of creditors of Northwest FCS in the event of liquidation.

Three of the senior officers most recently appointed to serve on the MEC do not yet participate in

the senior officer compensation plans described above and did not participate in the LTI plan in

2011. Their compensation is administered under programs in place for other members of

Northwest FCS’ management team. The specifics of these plans vary by participant depending on

the nature of their duties and responsibilities. Their base salaries are administered in accordance

with Northwest FCS’ established salary structure and provide the potential to earn short-term

bonus/incentive payments up to a maximum of 40 percent of their base salaries with a target of 32

percent based upon their accomplishment of predetermined organizational and personal

performance goals. In addition, while these three senior officers do not yet participate in the LTI

plan, they do participate in a retention plan applicable to a number of key employees. This

retention plan is not funded or held in trust but contractually obligates Northwest FCS to make

future payments in specified amounts. The amounts vary by participant. These payments are paid

to participants approximately two and a half years following their award. As with the LTI plan,

these senior officers forfeit those retention amounts if they resign prior to being paid. The total

base salary, short-term/incentives, and retention payments paid to these three senior officers are

included in the chart below. It is fully expected that these three senior officers will participate in

the senior officer compensation plan applicable to all senior officers, including the LTI plan, in

2012.

CEO Compensation

The CEO’s base salary is benchmarked against that paid to CEOs of comparable financial

institutions. In addition, the CEO can earn both STI and LTI awards each year based on specific

and pre-established individual and organizational performance goals. The CEO’s STI potential in

2011 was a maximum of 60 percent of his base salary, with a target of 30 percent to be awarded

for meeting these pre-established goals, and with the opportunity to earn up to an additional 30

percent for exceeding those goals. The CEO’s LTI award potential each year is up to a maximum of

100 percent of his base salary, with a target of 50 percent to be awarded for meeting these pre-

established goals; up to an additional 25 percent for exceeding those goals and with 25 percent

sole discretion retained by the Board to reflect exceptional performance or circumstances.

The actual STI award is based upon actual performance in accomplishing these predetermined

goals. Each goal is given a weighted number of points, the total of all goals equaling 100 percent.

Actual results then determine the number of points actually awarded for each goal. These total

awarded points are then added to determine the percentage of the maximum STI which will be

awarded. In the case of LTI, this same approach is used to measure results against these annual

goals. However, the Board reserves sole discretion in awarding up to 25 percent of the LTI award

as described herein.

The “Short-term Bonus” shown in the table below reflects the STI earned by the CEO in each year.

The “Deferred Award” shown in the table reflects the LTI 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.

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 15 percent of the total of his base

salary and short-term incentive each year. It is reported under “Perquisites/Other” in the table

below.

CEO Compensation shown for 2009 and 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 year 2011 reflects that awarded or paid to Mr. DiPofi, who assumed the position of President

and CEO effective January 1, 2011.

Senior Officer Compensation

The compensation plan for senior officers as described above provides for base salaries to be

administered consistent with competitive financial industry survey data of their position with

comparable financial institutions. This plan provides senior officers the opportunity to earn a STI of

up to a maximum of 50 percent with a target of 30 percent of their base salaries for meeting pre-

established performance goals and the potential to earn an additional 20 percent for exceeding

those goals. STI awards are paid in a lump sum in cash upon receipt of year-end financial

statements that support those awards. As noted above, three of the more recently appointed

senior officers who do not yet participate in the senior officer compensation plan, nonetheless have

the opportunity to earn short-term bonuses up to a maximum of 40 percent with a target of 32

percent. As with the senior officer compensation plan as described, these bonuses are awarded

based upon achieving specific pre-established performance goals and are paid in cash in a lump

sum once year-end financial and operational performance has been determined.

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The senior officers who participate in the LTI plan can earn up to a maximum of 25 percent of

their base salary. LTI awards, once made, are held in trust and are subject to forfeiture if these

senior officers resign within three years following the year the LTI was awarded. Also as noted

above, three of the more recently appointed senior officers who do not yet participate in the LTI

plan, participate in the retention plan described above. As indicated, the amounts vary, are not

held in trust as with the LTI plan and are carried as an obligation of Northwest FCS. These awards

are forfeited by these senior officers if they resign prior to payout.

STI and LTI are calculated the same for these senior officers as it is for the CEO except that

discretion in the LTI award is exercised by the CEO rather than the Board and is limited to 10

percent of the otherwise calculated award. The Board must approve STI and LTI awarded to these

senior officers.

The STI shown in the next table for these senior officers reflects the combined STI earned by

these senior officers in each year which is paid to these senior officers in the following year once

final year-end financial performance has been determined. Included in this figure is the “Short-

term Bonus” earned by the three more recently appointed senior officers. The “Deferred Award” in

this chart reflects the combined LTI awards to the senior officers who participate in the LTI plan in

the year they were earned, together with any gains or losses incurred on those LTI awards that

are held in trust, in the year identified. These LTI awards are subject to market value fluctuations

while held in trust. Therefore, the amount actually paid reflects those gains/losses while held in

trust. This amount also includes the actual retention award made to each of the three more

recently appointed senior officers in the year awarded.

* Jay Penick (2009 and 2010 only) and Phil DiPofi (2011 only)

**Deferred Awards – This figure reflects the principal amount of the LTI earned in each of the

three 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 the retention award made to those officers who

did not participate in the LTI plan.

***Perquisites/Other - The CEO is provided a leased vehicle for his business and personal use. The

income related to personal use of this vehicle, as determined by Internal Revenue Service

regulations, is included in the CEO’s total compensation. This item 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 figure includes the income related to Mr. DiPofi’s personal use of the leased

vehicle he is provided, and the 15 percent contribution to his nonqualified deferred compensation

plan described above. It also includes a portion of his moving and relocation expenses that were

“grossed up” to compensate him for the tax impact of those reimbursed expenses.

****The number of senior officers (excluding the CEO) shown in the chart above who served in

2011 was ten; in 2010, was seven and included Mr. DiPofi, who served as COO – President and

CEO-elect during the month of December 2010; and, in 2009 was six.

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The combined LTI awards actually paid to the senior officers (excluding the CEO) were

$1,281,804, $265,169 and $238,972 for the years 2011, 2010 and 2009, respectively. These

reflect long-term awards made in 2007, 2006 and 2005, 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 LTI plan. The 2011

figure also includes the complete payout of all LTI awards held in trust for two senior officers who

retired in 2011.

During 2009 and 2010, there were six employees who also served in senior officer roles as part of

a transition plan to facilitate the retirement of Mr. Penick and several other senior officers. They

did not participate in the senior officer compensation plan or the LTI plan. The base salaries of

these six officers were administered through Northwest FCS’ salary range structure. Salary ranges

are assigned to these positions based on competitive data for like positions with comparable

financial institutions. These senior officers had short-term bonus/incentive potentials that vary and

range from maximums of 30 to 45 percent of each of their base salaries. Several of these senior

officers also participate in various incentive plans, and all participate in a retention program. The

total payments under the compensation programs they participate in are set out in the next table.

Several of these officers were appointed to the MEC in 2011 and their compensation is included in

the discussion of senior officer compensation and the related chart above. The remainder of these

employees retain key positions at Northwest FCS but no longer serve as senior officers. As a result

their compensation is not disclosed for 2011, but as with all highly compensated employees, their

compensation is available upon request.

*Retention - These retention figures reflect the amount awarded to these senior officers in 2010

and 2009. These amounts are held as a general obligation of Northwest FCS and are not subject to

market gains/losses. Therefore, the amount awarded will be the same as the amount actually paid.

Compensation paid to officers whose compensation exceeds $50,000 is available and will be

disclosed to shareholders upon request. Officers are reimbursed for travel expenses and related

expenses while conducting association business.

TRANSACTIONS WITH SENIOR OFFICERS AND DIRECTORS

Information regarding related party transactions is incorporated herein by reference from Note 11

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, 2012, or at any

time during 2011.

RELATIONSHIP WITH INDEPENDENT PUBLIC AUDITORS

There were no changes in independent public auditors since the prior annual report to

stockholders. In addition to audit services, the independent public auditors,

PricewaterhouseCoopers, LLP prepared the 2010 tax returns for Northwest FCS for a fee of

$23,341. This non-audit service was approved by the Audit Committee. 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, 2011, 2010 and 2009,

were $368,500, $379,500 and $363,000, respectively. These fees and expenses were incurred for

the annual financial statement audit, including the audit of internal controls over financial reporting

as of December 31, 2011, 2010, and 2009.

FINANCIAL STATEMENTS

The financial statements, together with the Report of Independent Auditors dated March 1, 2012,

and the Report of Management appearing in this annual report are incorporated herein by

reference.

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RELATIONSHIP WITH COBANK, ACB

• Northwest FCS’ statutory obligation to borrow from CoBank, ACB is discussed in Note 7.

• CoBank, ACB’s ability to access the capital of Northwest FCS is discussed in Note 4.

• The major terms of any capital preservation, loss sharing or financial assistance agreements

between Northwest FCS and CoBank, ACB are discussed in Notes 1 and 8.

• A discussion of how the financial condition and results of operations of CoBank, ACB may

materially affect stockholder investment in Northwest FCS and Northwest FCS’ investment in

CoBank, ACB is discussed in Note 1.

• CoBank, ACB is required to distribute its annual report to shareholders of Northwest FCS if a

“significant event” as defined by FCA regulation occurs.

PRIVACY PROTECTION AFFORDED UNDER FCA REGULATIONS

Customer financial privacy and the security of other non-public information are important.

Therefore, Northwest FCS holds customer financial and other non-public information in strictest

confidence. Federal regulations allow disclosure of such information by Northwest FCS only in

certain situations. Examples of these situations include law enforcement or legal proceedings,

when such information is requested by a Farm Credit System or other financial institution with

which customers do business or consumer reporting agencies.

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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 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 There are several credit and other related services offered through the Board approved YBS

program directly and in coordination with others that allow Northwest FCS to effectively serve the

needs within the young, beginning, and small producer segments:

• Young, beginning, small, and minority producers who are actively involved in farming and

also those who may not meet traditional credit standards are considered under an outreach

loan program known as AgVision. AgVision customers account for approximately $200 million

of the portfolio loan volume. Through this program, special consideration is given in loan

underwriting ratios, interest rate concessions, and origination and appraisal fee waivers. Over

$1 million in fee waivers have been provided to AgVision customers since 2001, with over

$60,000 in fees waived in 2011.

• Small producers are primarily served through Northwest FCS’ Express Financing products.

These products are designed with a convenient and efficient delivery method. Small

producers are also eligible for the AgVision program.

• An advisory group comprised of young, beginning, and small farmers and ranchers was

created to provide Northwest FCS with customer feedback, function as a liaison to association

management, and advance YBS program benefits within the agricultural community.

• A portion of the young, beginning, and small loan portfolio is supported by government

guarantees, including guarantees by the Farm Service Agency (FSA) and USDA’s Business and

Industry Guaranteed Loan Program.

Government Guaranteed Loans to YBS Farmers and Ranchers

• More than $380,000 has been reimbursed to customers for education expenses, technology

purchases, recordkeeping, and tax planning and preparation services since the 2001 inception

of the AgVision program. The reimbursements totaled over $40,000 in 2011.

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• Training programs are targeted specifically to young, beginning, and small producers,

focusing on areas such as farm economics, financial literacy, profit, cash flow and succession

planning. Several workshops are held in Spanish for the benefit of our minority customers.

• The Northwest FCS’ Business Management Center helps customers assess, understand, and

improve management practices through group and individual interactions via orientations,

workshops, and consulting. Many of our YBS customers have taken part in these various

workshops.

• Northwest FCS provides donations and sponsors state and local FFA activities and

conventions, state 4-H activities and conventions, and agricultural leadership and educational

programs.

• In 2011, Northwest FCS offered thirty-two $1,500 college scholarships to qualified high school

seniors and twelve $1,500 scholarships to college juniors or seniors.

• Northwest FCS offers many services; including crop insurance, life insurance, and debt

protection that help our YBS producers mitigate risk.

Region Demographics The local service area of Northwest FCS primarily includes all counties in the states of Washington,

Montana, Oregon, Idaho, and Alaska. The following table presents a comparison of the

demographic information from the USDA’s 2007 Census of Agriculture for young, beginning, and

small producers in the territory to the results of the 2002 census. This census is conducted every

five years.

Census of Agriculture - Young, Beginning, and Small Producers

2007 vs. 2002

The 2007 Census of Agriculture results show an increase in young and small producers and a

decrease in beginning producers from 2002 to 2007 in the service area. The number of young

producers increased by 2 percent. The number of beginning farmers decreased by 3 percent. The

number of small producers increased by 1 percent.

YBS Volume in the Northwest FCS Portfolio The following table outlines the percentage of young, beginning and small producers’ loans in the

Northwest FCS loan portfolio as of December 31, 2011, compared to the total number of loans in

the portfolio. There are differences in the methods by which the census demographics and the

Northwest FCS’ data are presented. 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 & Results Quantitative targets have been established by board policy for young, beginning and small farmers

in loan volume and number of loans based upon demographic data. These targets are shown as

follows:

2011 Young, Beginning and Small Service Goals & Results

The data reveals Northwest FCS met its loan number projections for Young and Beginning

producers. Although the data reveals Northwest FCS did not meet its volume projections in all

categories, some of this decrease was due to the positive agricultural environment in 2011.

Northwest FCS will continue its mission to advance young, beginning, and small farmers through

deliberate lending strategies and producer educational opportunities.

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LOCAL ADVISORS

IDAHO MONTANA OREGON WASHINGTON Robert Ball Hamer Bill Bergin, Jr. Melstone Monet Allen Montague, CA Dave Allan Wapato Adrian Boer Jerome Adam Billmayer Hogeland Dwight Arnoldus Cove Melissa Bedlington-Kleindel Lynden Doug Carlquist Eden Bart Bitz Big Sandy Ed Bair Klamath Falls Jeff Bosma Outlook Ray Carlson Blackfoot Keven Bradley Cut Bank Lori Baley Malin Russ Byerley Touchet Bill Clayton Wilder Tom Cheetham Redstone Tim Bare Roseburg Roger Canfield Olympia Cade Crapo St. Anthony Don Connelly Valier Glenn Barrett Bonanza Mike Cobb Ephrata Ron Elkin Buhl Bret Conover Broadview John Boyer Haines Bill denHoed Grandview Carl Ellsworth Leadore Calvin Danreuther Loma Greg Brink Joseph Richard DeRuwe Dayton David Funk Hansen Cory Davis Townsend Ron Brown Milton-Freewater Frank DeVries Lynden LeRoy Funk Burley Nels DeBruycker Choteau Warren Chamberlain Vale Scott Eschbach Yakima Brent Griffin Rupert Brian Dice Volborg Dan Dawson Roseburg Patrick Escure Quincy Jeff Harper Mountain Home Vicki Eggebrecht Malta Mike DeWall Harrisburg Kevin Filbrun Pasco John Hepton Nampa Conni French Malta Susan Doverspike Burns Stacy Gilmore Pasco Jackie Hillman Dubois Joe Fretheim Shelby Rod Fessler Madras Norm Gutzwiler Malaga Ken Koompin American Falls Beth Granger Great Falls Joe Finegan Cornelius Lori Hayles Pasco Karen Lustig Cottonwood Chad Hansen Dillon Skip Gray Albany Gary Kehl Quincy Marty Lux Nezperce John Helle Dillon Dennis Harmon Grants Pass Jim Kile St. John Dan Mader Genesee Courtney Herzog Rapelje Ron Hjort Oakland Cris Kincaid Pullman Ray Matsuura Blackfoot Craig Henke Chester Gary Hull Lebanon Jim Klaustermeyer Othello Kyle Meyer Rathdrum Dale Hirsch Kinsey Matt Insko LaGrande Dave Klaveano Pomeroy Ron Mio Fruitland Craig Iverson Winnett Dave Kauer Amity Tristan Klesick Stanwood Greg Moss Ketchum Tim Johnson Dutton Mark Krautmann Salem Chris Kontos Walla Walla Kirk Nickerson Howe Del Kamerman Bozeman David Kunkel Portland Steve Krupke Reardan Jeff Pahl Pocatello Alan Klempel Bloomfield Leland Lage Hood River Josh Lawrence Royal City Erick Peterson Moscow Paul Kronebusch Conrad Dan C. Lewis Gaston Poppie Mantone Bingen David Rallison Franklin Tim Lake Polson Sharon Livingston Mt. Vernon Sarah McClure Walla Walla D. Brad Reed Idaho Falls Bill Lauckner, Jr. Nashua Bill Martin Rufus Dan McKay Almira Nate Riggers Nez Perce Kirk Montgomery Rosebud Scott McClaran Joseph Alan Mesman Mt. Vernon Doug Ruff Aberdeen Bryan Mussard Dillon Ron Meyer Talent John Miller Toledo Royce Schwenkfelder Cambridge Corie Mydland Joliet Greg Myers Tillamook Pat Murphy Chehalis Kirt Schwieder Idaho Falls Tracy Mytty Florence David Neal Tangent Chuck Podlich Orondo Scott Searle Shelley Shawn Rettig Rudyard Mary Olson Monmouth Jeff Raap Ellensburg Todd Simmons Terreton Randy Ridgeway Stanford Larry Parker Helix Sara Rolfs Wenatchee Robert Swainston Preston Dave Sattoriva Hingham Alan Parks Silver Lake Jeff Schilter Olympia Ryan Telford Richfield Nancy Schlepp Ringling Vikki Price Nyssa Danielle Scrupps Ritzville Bernie Teunissen Caldwell Dennis Schmierer Savage John Reerslev Junction City Ben Smith Sequim Dale Thomas Gooding Leonard Schock Vida Jim Schaefer Molalla Mark Tudor Grandview Steven Toone Grace Amy Sinks Jordan Steven Sugg The Dalles Jake Wardenaar Royal City James Udy American Falls Kim Skinner Hall Anna Sullivan Hereford Andy Werkhoven Monroe Shawn Webster Rexburg Larry Steffes Plevna Steve Walker Stanfield Brandy Wigen Colfax Mike Wheeler Declo Steve Swank Chinook Charlie Waterman Bandon Ann T. Wilson Hammett Dale Tarum Richland Bill Wilber Burns Berkley Wray Blackfoot Bob Taylor Denton Randy Wheatley McCammon Miles Torske Hardin Carl Traeholt Wolf Point Brian Tutvedt Kalispell Larry Tveit, Jr. Fairview Bruce Udelhoven Winifred Jeff Volf Judith Gap Mike Wallewein Conrad Steve Wood Sheridan As of: 3/1/2012

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OFFICE LOCATIONS Northwest FCS Headquarters 1700 S. Assembly Street Spokane, Washington 99220 (509) 340-5300 * Northwest FCS Owned

IDAHO MONTANA OREGON WASHINGTON

73 Fort Hall Avenue, Suite A American Falls, ID 83211 208-226-1340

370 North Meridian Street, Suite A Blackfoot, ID 83221 208-782-3800

1408 Pomerelle Avenue, Suite B Burley, ID 83318-2064 208-678-6650

501 King Street PO Box 177 Cottonwood, ID 83522 208-962-2280

2225 West Broadway, Suite A Idaho Falls, ID 83402 208-552-2300

2631 Nez Perce Drive, Suite 201 Lewiston, ID 83501 208-799-4800

16034 Equine Drive Nampa, ID 83687 208-468-1600

102 North State Preston, ID 83263 208-852-2145

1036 Erikson Drive Rexburg, ID 83440 208-656-2100

815 North College Road Twin Falls, ID 83303 208-732-1000

139 River Vista Place, Suite 201 Twin Falls, ID 83301 208-732-1000

Tech Plaza, Building 1, Suite 300 3490 Gable Road Billings, MT 59108 406-651-1670

1001 West Oak, Farm Credit Building, Suite 200 Bozeman, MT 59772 406-556-7300

519 South Main Conrad, MT 59425 406-278-4600

38 A South Central Avenue Cut Bank, MT 59427 406-873-9070

134 East Reeder Street Dillon, MT 59725 406-683-1200

501 First Avenue South Glasgow, MT 59230 406-228-3900

700 River Drive South Great Falls, MT 59405 406-268-2200

1705 Hwy 2 NW, Suite A Havre, MT 59501 406-265-7878

120 Wunderlin Street, Suite 6 Lewistown, MT 59457 406-538-7737

502 South Haynes Miles City, MT 59301 406-233-3100

3021 Palmer Street, Suite B Missoula, MT 59808 406-532-4900

123 North Central Avenue Sidney, MT 59270 406-433-3920

3370 10th Street, Suite B Baker City, OR 97814 541-524-2920

2345 NW Amberbrook Drive, Suite 100 Beaverton, OR 97006 503-844-7920

650 E Pine, Suite 106A Central Point, OR 97502 541-665-6100

2911 Tennyson Avenue, Suite 301 Eugene, OR 97408 541-685-6140

300 Klamath Avenue, Suite 200 Klamath Falls, OR 97601 541-850-7500

378 West Idaho Avenue Ontario, OR 97914 541-823-2660

12 Southwest Nye Pendleton, OR 97801 541-278-3300

3113 S Highway 97, Suite 100 Redmond, OR 97756 541-504-3500

2222 NW Kline Street Roseburg, OR 97471 541-464-6700

650 Hawthorn Avenue SE, Suite 210 Salem, OR 97309-9831 503-373-3000

3591 Klindt Drive, Suite 110 The Dalles, OR 97058 541-298-3400

265 East George Hopper Road Burlington, WA 98233 360-707-2353

629 South Market Boulevard Chehalis, WA 98532 360-767-1100

224 North Main Street Colfax, WA 99111 509-397-2840

667 Grant Road, Suite 1 East Wenatchee, WA 98802 509-665-2160

1501 East Yonezawa Blvd Moses Lake, WA 98837 509-764-2700

455 Hemlock Street, Suite D Othello, WA 99344 509-488-2396

9530 Bedford Street Pasco, WA 99301 509-542-3720

1223 Sheridan Avenue, Suite A Prosser, WA 99350 509-786-6400

201 B West Broadway Ritzville, WA 99169 509-659-1105

1900 West Nickerson Street, Ste 215 Seattle, WA 98119 206-691-2000

1515 S Technology Blvd, Suite B Spokane, WA 99224 509-340-5600

2735 Allen Road Sunnyside, WA 98944 509-836-3080

*1 West Pine Walla Walla, WA 99362 509-525-2400

*1360 North 16th Avenue Yakima, WA 98902 509-225-3200

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northwest farm credit services 2011 annual report

Documents

northwest fcs customers

northwest fcs board

helm of northwest fcs

northwest farm credit

northwest fcs funding

federal land banks

heart of northwest fcs

value of land