northwest farm credit services 2013 annual report
DESCRIPTION
2013 Annual ReportTRANSCRIPT
2 0 1 3 A N N U A L R E P O R T
Preparing the NextGeneration of Leadership
Visit us at: northwestfcs.comYou may receive multiple copies of the annual report due to system changes and the need to send annual financial information to every stockholder of record.
PATRONAGE PAID($ in millions)
2009 2010 2011 2012 2013
26.0
36.0
53.3 55.258.1
Karen SchottBoard Chair
Bar Four RanchBroadview, Montana
The Schott family raises winter wheat, spring wheat, peas and also managesa lease pasture operation.
Investments in youth education, industry associations, sponsorships and our Rural Community Grant Program are making a profound difference in the communities where we live and work.
We would like to extend our gratitude to Bruce Nelson and Drew Eggers as they retire from the board of directors after 15 and 13 years respectively. Their leadership, expe-rience and considerable expertise in many areas has been invaluable in overseeing Northwest FCS’ strategy and performance. We wish Bruce, Drew and their families the very best and we look forward to welcoming two new directors in March.
On behalf of the Northwest FCS Board, we appreciate the confidence our customer-owners have placed in this association. We also want to recognize our 180 Local Advi-sory Committee members, 640 employees and our senior leadership team for a job well done.
2013 was another successful year for the association. We posted record net income that provided strong growth in capital, allowing Northwest FCS to strengthen its financial capacity to serve our customers. The association also paid $58.1 million in cash patronage to our customer-owners across the Northwest.
Those of us in agriculture have experienced a strong run the past several years during a time when many areas of the economy have struggled. But, we all know good times never last forever. The board and management team are carefully monitoring trends and economic indicators to ensure we are well po-sitioned and continue to build organizational capacity to support Northwest agriculture for generations to come.
To complement the business side of our mission, Northwest FCS continues to put the company’s talent and resources back into our rural communities. We believe strong communities foster strong businesses.
On Behalf of the Board
2
Pictured left to right:
Dave Nisbet Bay Center, Washington
Drew Eggers Meridian, Idaho
John Helle Dillon, Montana
Shawn Walters New Dale, Idaho
2013 Board of Directors
Kevin Riel Yakima, Washington
Julie Shiflett Spokane, Washington
Mark Gehring Salem, Oregon
Jim Farmer Nyssa, Oregon
Rick Barnes Callahan, California
Herb Karst Sunburst, Montana
Christy Burmeister-Smith Newman Lake, Washington
Bruce Nelson Spokane, Washington
Karen Schott Chair - Broadview, Montana
Dave Hedlin Vice Chair - Mt. Vernon, Washington
PATRONAGE PAID($ in millions)
2009 2010 2011 2012 2013
26.0
36.0
53.3 55.258.1
Karen SchottBoard Chair
Bar Four RanchBroadview, Montana
The Schott family raises winter wheat, spring wheat, peas and also managesa lease pasture operation.
Investments in youth education, industry associations, sponsorships and our Rural Community Grant Program are making a profound difference in the communities where we live and work.
We would like to extend our gratitude to Bruce Nelson and Drew Eggers as they retire from the board of directors after 15 and 13 years respectively. Their leadership, expe-rience and considerable expertise in many areas has been invaluable in overseeing Northwest FCS’ strategy and performance. We wish Bruce, Drew and their families the very best and we look forward to welcoming two new directors in March.
On behalf of the Northwest FCS Board, we appreciate the confidence our customer-owners have placed in this association. We also want to recognize our 180 Local Advi-sory Committee members, 640 employees and our senior leadership team for a job well done.
2013 was another successful year for the association. We posted record net income that provided strong growth in capital, allowing Northwest FCS to strengthen its financial capacity to serve our customers. The association also paid $58.1 million in cash patronage to our customer-owners across the Northwest.
Those of us in agriculture have experienced a strong run the past several years during a time when many areas of the economy have struggled. But, we all know good times never last forever. The board and management team are carefully monitoring trends and economic indicators to ensure we are well po-sitioned and continue to build organizational capacity to support Northwest agriculture for generations to come.
To complement the business side of our mission, Northwest FCS continues to put the company’s talent and resources back into our rural communities. We believe strong communities foster strong businesses.
On Behalf of the Board
2
Pictured left to right:
Dave Nisbet Bay Center, Washington
Drew Eggers Meridian, Idaho
John Helle Dillon, Montana
Shawn Walters New Dale, Idaho
2013 Board of Directors
Kevin Riel Yakima, Washington
Julie Shiflett Spokane, Washington
Mark Gehring Salem, Oregon
Jim Farmer Nyssa, Oregon
Rick Barnes Callahan, California
Herb Karst Sunburst, Montana
Christy Burmeister-Smith Newman Lake, Washington
Bruce Nelson Spokane, Washington
Karen Schott Chair - Broadview, Montana
Dave Hedlin Vice Chair - Mt. Vernon, Washington
Insights from the CEOadvisors. By “trusted advisors” we mean knowledgeable staff who take time to understand our customers’ businesses and get to know their families and other key players in their operation and industry. Customers tell us their trusted advisors are a valued resource to help them grow and transition their businesses to the next generation.
Securing affordable financing is one of the biggest challenges faced by the next generation in agriculture, forestry and fisheries. Helping these
young and beginning producers start and grow their own businesses is an integral part of our cooperative mission. During 2013, the number of customers financed by our AgVision program increased signifi-cantly. We’ve added additional staff to work with and mentor these producers to make sound management decisions, thereby strengthening the foundation for the future of our industry.
Our Business Management Center programs help the next generation to improve and refine their financial and management skills.
In 2013 we launched our new RateWise program that rewards young and beginning producers for continuing their management education with interest rate reductions on new loans. We call it, “Learn and earn.”
Human Resource CapacityThe strength of our business has always been defined by the quality of our people and our performance-driven culture. We know the quality of our people differentiates this organization and will serve as the cornerstone of our success. For us to be successful, our employees must reflect the diversity of the communities and cultures in which we operate. That means we must attract, retain and motivate people from many backgrounds and perspectives. Over the past three years we have increased our staffing levels, and on average, we’ve hired 27 trainees per
year to ensure we continually bring new talent into the organization, build bench strength for the future and address ongoing succession needs. Investments in these trainees are substantial and include individual mentoring from our more experienced employees.
During 2013 we partnered with the Gallup research company to help us better understand and improve our level of employee engagement. Gallup defines engagement as an employees' involvement with, commitment to and satisfaction with work. Our initial results were very strong and we will continue to build on our strengths going forward.
I’m continually inspired by stories from employees who are reaching out to support worthy causes in their com-munities. They donate their time, talents and financial resources to care for our military veterans, secure food for local food banks or race to find a cure for cancer, just to name a few. To support their generosity we’re now providing three days of paid time off each year to continue this heart-felt work.
Operations Capacity2013 was a very productive year for operations and technology improvements. To top the list of accomplish-ments, we successfully converted our loan accounting system from one that was outdated to a new, more powerful system that is used by several Farm Credit associations. We save significant dollars by partnering with others. With the loan accounting conversion behind us, we’re now turning our attention to enhance customer and staff-related technologies in 2014.
We must make it easier for customers to do business with us electronically. Over the next two years we will develop customized web access to allow each customer to indi-vidualize their Northwest FCS access and banking information. We will also enhance the suite of online banking tools we offer.
Financial CapacityIncreasing our financial capacity means we build an organization that can handle future customer needs, make investments back into the business and pay an appropriate return
in the form of patronage to our customer-owners. Plus, the organization must have the financial capacity to withstand increasing volatility.
Improving the association’s credit quality has been a major focus area the past several years following the economic downturn in 2008-2009 when several industries faced historically hard times. We’ve worked closely with many of these customers as they’ve executed recovery plans to reposition their operations. We believe this even-handed and measured approach has reinforced our value proposition and deepened our long-term customer
relationships. In 2013 we significantly improved credit quality. Financial resources previously used to fund allowances for credit losses can now be used for more productive investments. Our capital grew to $1.8 billion, up 12.2 percent from $1.6 billion in 2012. A strong capital base provides for future loan growth and helps us withstand unforeseen future downturns.
Looking ForwardLooking forward, our greatest challenge and opportu-nity will be increasing our human resource capacity. We know strong teams with great people outperform individuals. As our customers successfully transition their businesses to the next generation, we are also
developing our employees with an eye to the future. Promising young people are being mentored by our wise, experienced leaders. New technologies are being implemented to help our employees build fresh, new skills to better serve our customers. We will continue to build a purpose-driven culture – the foundation for any successful business – that inspires our people to grow and reach their full potential as we position to serve agriculture for generations to come.
2009 2010 2011 2012 2013
1.21.3
1.4
1.6
1.8
C APITAL($ in billions) 236.9
2009 2010 2011 2012 2013
106.1
150.1 159.2
187.3
NET INCOMEAFTER TAXES($ in millions)
As a cooperative, our goal is to provide value to you as a customer and an owner. As our customer, we strive to provide products at prices that are competitive, earning your trust through our knowledge of your business, the dedication and quality of our staff, and even-handedness through the inevitable cycles in agriculture. As an owner, we aim to provide you a meaningful return of value in the form of patronage dividends. In 2013 we returned $58.1 million in patronage to our customer-owners.
Your cooperative earned a record $236.9 million in 2013, up 26.5 percent from $187.3 million in 2012. A combination of factors contributed to our financial results, with credit quality improvement being the single largest factor. Producers continued to experience strong prices for most commodities, resulting in strong levels of net income. This year we saw many customers pay down or pay off debt, which limited our growth to a degree. We’ve been pleased to see our customers’ financial capacity continue to strengthen in these high income years for agriculture.
Building CapacityStrategy is about making choices, building competitive advantage and planning for the future. Strategy is not set through one initiative or one big deal. Rather, we build it by making sound decisions and enhancing capacity. We continued to build our organizational capacity during 2013 by concentrating on four key areas in our business plan – our customers, our people, operations, and our financial strength. In each of these vital areas, we made significant gains to build a business that will sustain itself during the inevitable cycles we’ll face in the future.
Customer CapacityThis year we placed a greater emphasis on developing our staff as trusted
3 4
“Customers tell us their trusted
advisors are a valued resource
to help them grow and
transition their business to
the next generation.”
Phil DiPofiPresident and CEO
NorthwestFarm Credit ServicesSpokane, Washington
Northwest FCS isthe leading financial cooperative in the Northwest with 45 branches and 640 employees in Idaho, Montana, Oregon, Washington and Alaska.
Insights from the CEOadvisors. By “trusted advisors” we mean knowledgeable staff who take time to understand our customers’ businesses and get to know their families and other key players in their operation and industry. Customers tell us their trusted advisors are a valued resource to help them grow and transition their businesses to the next generation.
Securing affordable financing is one of the biggest challenges faced by the next generation in agriculture, forestry and fisheries. Helping these
young and beginning producers start and grow their own businesses is an integral part of our cooperative mission. During 2013, the number of customers financed by our AgVision program increased signifi-cantly. We’ve added additional staff to work with and mentor these producers to make sound management decisions, thereby strengthening the foundation for the future of our industry.
Our Business Management Center programs help the next generation to improve and refine their financial and management skills.
In 2013 we launched our new RateWise program that rewards young and beginning producers for continuing their management education with interest rate reductions on new loans. We call it, “Learn and earn.”
Human Resource CapacityThe strength of our business has always been defined by the quality of our people and our performance-driven culture. We know the quality of our people differentiates this organization and will serve as the cornerstone of our success. For us to be successful, our employees must reflect the diversity of the communities and cultures in which we operate. That means we must attract, retain and motivate people from many backgrounds and perspectives. Over the past three years we have increased our staffing levels, and on average, we’ve hired 27 trainees per
year to ensure we continually bring new talent into the organization, build bench strength for the future and address ongoing succession needs. Investments in these trainees are substantial and include individual mentoring from our more experienced employees.
During 2013 we partnered with the Gallup research company to help us better understand and improve our level of employee engagement. Gallup defines engagement as an employees' involvement with, commitment to and satisfaction with work. Our initial results were very strong and we will continue to build on our strengths going forward.
I’m continually inspired by stories from employees who are reaching out to support worthy causes in their com-munities. They donate their time, talents and financial resources to care for our military veterans, secure food for local food banks or race to find a cure for cancer, just to name a few. To support their generosity we’re now providing three days of paid time off each year to continue this heart-felt work.
Operations Capacity2013 was a very productive year for operations and technology improvements. To top the list of accomplish-ments, we successfully converted our loan accounting system from one that was outdated to a new, more powerful system that is used by several Farm Credit associations. We save significant dollars by partnering with others. With the loan accounting conversion behind us, we’re now turning our attention to enhance customer and staff-related technologies in 2014.
We must make it easier for customers to do business with us electronically. Over the next two years we will develop customized web access to allow each customer to indi-vidualize their Northwest FCS access and banking information. We will also enhance the suite of online banking tools we offer.
Financial CapacityIncreasing our financial capacity means we build an organization that can handle future customer needs, make investments back into the business and pay an appropriate return
in the form of patronage to our customer-owners. Plus, the organization must have the financial capacity to withstand increasing volatility.
Improving the association’s credit quality has been a major focus area the past several years following the economic downturn in 2008-2009 when several industries faced historically hard times. We’ve worked closely with many of these customers as they’ve executed recovery plans to reposition their operations. We believe this even-handed and measured approach has reinforced our value proposition and deepened our long-term customer
relationships. In 2013 we significantly improved credit quality. Financial resources previously used to fund allowances for credit losses can now be used for more productive investments. Our capital grew to $1.8 billion, up 12.2 percent from $1.6 billion in 2012. A strong capital base provides for future loan growth and helps us withstand unforeseen future downturns.
Looking ForwardLooking forward, our greatest challenge and opportu-nity will be increasing our human resource capacity. We know strong teams with great people outperform individuals. As our customers successfully transition their businesses to the next generation, we are also
developing our employees with an eye to the future. Promising young people are being mentored by our wise, experienced leaders. New technologies are being implemented to help our employees build fresh, new skills to better serve our customers. We will continue to build a purpose-driven culture – the foundation for any successful business – that inspires our people to grow and reach their full potential as we position to serve agriculture for generations to come.
2009 2010 2011 2012 2013
1.21.3
1.4
1.6
1.8
C APITAL($ in billions) 236.9
2009 2010 2011 2012 2013
106.1
150.1 159.2
187.3
NET INCOMEAFTER TAXES($ in millions)
As a cooperative, our goal is to provide value to you as a customer and an owner. As our customer, we strive to provide products at prices that are competitive, earning your trust through our knowledge of your business, the dedication and quality of our staff, and even-handedness through the inevitable cycles in agriculture. As an owner, we aim to provide you a meaningful return of value in the form of patronage dividends. In 2013 we returned $58.1 million in patronage to our customer-owners.
Your cooperative earned a record $236.9 million in 2013, up 26.5 percent from $187.3 million in 2012. A combination of factors contributed to our financial results, with credit quality improvement being the single largest factor. Producers continued to experience strong prices for most commodities, resulting in strong levels of net income. This year we saw many customers pay down or pay off debt, which limited our growth to a degree. We’ve been pleased to see our customers’ financial capacity continue to strengthen in these high income years for agriculture.
Building CapacityStrategy is about making choices, building competitive advantage and planning for the future. Strategy is not set through one initiative or one big deal. Rather, we build it by making sound decisions and enhancing capacity. We continued to build our organizational capacity during 2013 by concentrating on four key areas in our business plan – our customers, our people, operations, and our financial strength. In each of these vital areas, we made significant gains to build a business that will sustain itself during the inevitable cycles we’ll face in the future.
Customer CapacityThis year we placed a greater emphasis on developing our staff as trusted
3 4
“Customers tell us their trusted
advisors are a valued resource
to help them grow and
transition their business to
the next generation.”
Phil DiPofiPresident and CEO
NorthwestFarm Credit ServicesSpokane, Washington
Northwest FCS isthe leading financial cooperative in the Northwest with 45 branches and 640 employees in Idaho, Montana, Oregon, Washington and Alaska.
6
Today, about 60 percent of farmers in this country are 55 years or older. For every one farmer and rancher under the age of 25, five
others are 75 or older. Getting young people involved in agriculture is critical to meeting the growing demand for food.
Fortunately, agriculture has been a bright spot in an otherwise weak economy and more young people are showing an interest.
Yet, it’s never easy to transition to the next generation, particularly for family-owned, capital intensive businesses. Young people
with passion need to be prepared to manage and lead. Economically, the business model has to perpetuate long-term growth.
If Northwest FCS customers are an indication of the future, agriculture is in good hands.
Experts predict a growing world population that will require 70 percentmore food production by 2050 – just 36 years away.
Generational Transitions – Building for the Future
6
Today, about 60 percent of farmers in this country are 55 years or older. For every one farmer and rancher under the age of 25, five
others are 75 or older. Getting young people involved in agriculture is critical to meeting the growing demand for food.
Fortunately, agriculture has been a bright spot in an otherwise weak economy and more young people are showing an interest.
Yet, it’s never easy to transition to the next generation, particularly for family-owned, capital intensive businesses. Young people
with passion need to be prepared to manage and lead. Economically, the business model has to perpetuate long-term growth.
If Northwest FCS customers are an indication of the future, agriculture is in good hands.
Experts predict a growing world population that will require 70 percentmore food production by 2050 – just 36 years away.
Generational Transitions – Building for the Future
Creating an On-Ramp into the Businessour foreman. These guys are natural leaders with respect from their peers. Now they look for solutions together before they call me. Our goal is to develop a team with the field expertise to support Adam and Hannah going forward.
Today Adam is leading our weekly manager meetings, keeping track of assignments and holding people accountable. Hannah handles payroll, food safety and accounting. I can still use my
horticulture experience to help during the spring but they really won’t need me at harvest. Ultimately my goal is to become nonessential and contribute more than I cost.
What would I tell others about succes-sion planning? Prepare, take your time and think it through. I envisioned the transition as being a tranquil period where everything would stay the same. But no, things get more complex. The company we’re transitioning today isn’t the same company we started transitioning two years ago. The business doesn’t stand still. We don’t always have clearly defined roles and
boundaries for people to operate within. But, I think we’re dynamic and adapting as we go.
Hannah and Adam have youth, energy and passion on their side. Adam learns better by doing versus being told what to do. He reminds me a lot of myself years ago. He’s confident and willing to try new things. That’s how Sharon and I started out. Now we’re working together to build a company that will thrive without us.
“Succession won’t happen
unless I make it happen. The
next generation can just be
workers or we can begin to
think like business owners.”
– Adam Poush
Top middle: Chuck and Northwest FCS Relationship Manager Alan Kirpes
Left: Sharon, Chuck and Alan Kirpes
Far right: Hannah and Adam Poush
Middle: Chuck and Sharon
Bottom middle: Adam, Hannah, Sharon and Chuck
Chuck PodlichOwner
Cider Works FarmsOrondo, Washington
Manages a 300-acre orchard with cider production facility, country market and fruit stand.
My wife Sharon and I are �rst generation fruit growers. We moved to Washington 35 years ago from the East Coast where I studied horticulture. People said if you want to get into the orchard business you either marry it or inherit it. But, we’re both a little headstrong. We found another way in by starting with nothing and adding a little bit here and there. We could make mistakes without a lot to lose back then. It’s much di�erent today with the size and scope of our business.
Sharon and I always thought we’d sell the business when we were tired of it. We didn’t think any of our four daughters would want to come back. But, in 2009 we started working on a succession plan when Hannah, 27, and her husband Adam, 29, wanted to leave their Portland-based careers for an on-ramp into the business. It didn’t take long to feel honored that we created a business someone wants to continue.
Adam grew up in Portland. He didn’t know anything about trees when he came here in 2012. I’m a horticulturist, so I don’t think it’s fair to expect Adam to be my direct replacement. But he’s a good business man. The �rst year Adam learned everything he could about our cider press and retail business. He’s managing those employees on a year-round basis now. Sometimes I think it’s a little tough for Sharon to let go of the retail business she built and I feel the same way on the orchard side.
In the �eld we’ve added a mid-level management team to work with
7
“I frequently bounce ideas offour Northwest FCS relationship
manager when it comes toexpansion. As a trusted advisor
Alan offers a valuable perspective that keeps me grounded in reality,
yet honors my dreams.”– Chuck Podlich
Creating an On-Ramp into the Businessour foreman. These guys are natural leaders with respect from their peers. Now they look for solutions together before they call me. Our goal is to develop a team with the field expertise to support Adam and Hannah going forward.
Today Adam is leading our weekly manager meetings, keeping track of assignments and holding people accountable. Hannah handles payroll, food safety and accounting. I can still use my
horticulture experience to help during the spring but they really won’t need me at harvest. Ultimately my goal is to become nonessential and contribute more than I cost.
What would I tell others about succes-sion planning? Prepare, take your time and think it through. I envisioned the transition as being a tranquil period where everything would stay the same. But no, things get more complex. The company we’re transitioning today isn’t the same company we started transitioning two years ago. The business doesn’t stand still. We don’t always have clearly defined roles and
boundaries for people to operate within. But, I think we’re dynamic and adapting as we go.
Hannah and Adam have youth, energy and passion on their side. Adam learns better by doing versus being told what to do. He reminds me a lot of myself years ago. He’s confident and willing to try new things. That’s how Sharon and I started out. Now we’re working together to build a company that will thrive without us.
“Succession won’t happen
unless I make it happen. The
next generation can just be
workers or we can begin to
think like business owners.”
– Adam Poush
Top middle: Chuck and Northwest FCS Relationship Manager Alan Kirpes
Left: Sharon, Chuck and Alan Kirpes
Far right: Hannah and Adam Poush
Middle: Chuck and Sharon
Bottom middle: Adam, Hannah, Sharon and Chuck
Chuck PodlichOwner
Cider Works FarmsOrondo, Washington
Manages a 300-acre orchard with cider production facility, country market and fruit stand.
My wife Sharon and I are �rst generation fruit growers. We moved to Washington 35 years ago from the East Coast where I studied horticulture. People said if you want to get into the orchard business you either marry it or inherit it. But, we’re both a little headstrong. We found another way in by starting with nothing and adding a little bit here and there. We could make mistakes without a lot to lose back then. It’s much di�erent today with the size and scope of our business.
Sharon and I always thought we’d sell the business when we were tired of it. We didn’t think any of our four daughters would want to come back. But, in 2009 we started working on a succession plan when Hannah, 27, and her husband Adam, 29, wanted to leave their Portland-based careers for an on-ramp into the business. It didn’t take long to feel honored that we created a business someone wants to continue.
Adam grew up in Portland. He didn’t know anything about trees when he came here in 2012. I’m a horticulturist, so I don’t think it’s fair to expect Adam to be my direct replacement. But he’s a good business man. The �rst year Adam learned everything he could about our cider press and retail business. He’s managing those employees on a year-round basis now. Sometimes I think it’s a little tough for Sharon to let go of the retail business she built and I feel the same way on the orchard side.
In the �eld we’ve added a mid-level management team to work with
7
“I frequently bounce ideas offour Northwest FCS relationship
manager when it comes toexpansion. As a trusted advisor
Alan offers a valuable perspective that keeps me grounded in reality,
yet honors my dreams.”– Chuck Podlich
Cousins Transition to Take OverThis year, the cousins will manage their own farm together called Koompin Ag. We’re leasing them ground – large enough to make it worth their while – and renting them machinery. They can buy fertilizer at our cost, but they’ll track usage and pay expenses in real dollars. Costs need to be near market value for them to learn. It either pencils or it doesn’t. This is a training ground and they’re calling the shots together.
Sometimes raising crops is the easy part. Family business issues can be much more complicated and stressful. There will be differences of opinion. We’ve always said this is a democracy so every-one needs to speak up and voice their opinions. We try to come to consensus. If the vote doesn’t go your way though, you still support the decision. It was easier for Klaren and I to make decisions than it will be for the four of them. But, we’re a family who loves each other and business decisions need to be made. They will figure it out. And we’ve got to let them do it.
The next generation will have more opportunities than we did. They have impressive computer skills and learn new technology quickly. We wouldn’t be able to manage an operation of this size without them. They’re smart kids and they see the big picture. If we continue to keep the farm viable and intact, there’s no reason they can’t make it bigger and better together.
“You want to let the next
generation experience their
own successes and failures
as long as the failures don’t
cost too much money.”
– Klaren Koompin
Top left: Klaren and Kenny
Top right: Klaren, Kenny and Northwest FCS Relationship Manager Adam Teichert
Middle: Kael, Kamren and Klaren
Bottom left: Kenny, Adam and Klaren
Middle right: Pete, Kenny and Amanda
Kenny KoompinPartner
Koompin FarmsAmerican Falls, Idaho
Raises 8,200 acres of row crops including potatoes, wheat, barley and corn.
People say my brother and I are opposites – Klaren is the visionary and I keep our eyes on the ball. Dad passed away when we were young so everything we learned about farming after college was through trial and error. Our old high school coach encouraged us to grow and eventually became a silent partner. We weren’t necessar-ily expanding the operation for the next generation. We expanded to reach critical mass and economies of scale to be viable. Now the farm is in a position for our four kids to manage together.
Working with multiple cousins will be different than farming with a brother. Right now the kids have their own areas of responsibility, but we’re bringing them together to make decisions. We have a wide range of ages and experi-ences, too. Klaren’s oldest son Kamren, 33, has been here nine years since he graduated from college. His son Kael, 32, has worked eight years for us. My son Pete, 26, came back after he graduated in 2010 and my daughter Amanda, 27, joined us after college a year later. Given the ages, Kamren will be retiring when Pete has 10 years left in the business.
Today the kids are helping us track costs to the acre. They’ve all attended Northwest FCS financial workshops and we meet together with our relationship manager to review the budget. They understand the gross figures, but now we’re digging into the details. At some point we’ll need to turn responsibility over and let them make all the decisions. We’re not there yet, but we’re getting closer all the time.
“To be a viable business long term, you need a
competitive lender who shares your vision.”
– Klaren Koompin
9
Cousins Transition to Take OverThis year, the cousins will manage their own farm together called Koompin Ag. We’re leasing them ground – large enough to make it worth their while – and renting them machinery. They can buy fertilizer at our cost, but they’ll track usage and pay expenses in real dollars. Costs need to be near market value for them to learn. It either pencils or it doesn’t. This is a training ground and they’re calling the shots together.
Sometimes raising crops is the easy part. Family business issues can be much more complicated and stressful. There will be differences of opinion. We’ve always said this is a democracy so every-one needs to speak up and voice their opinions. We try to come to consensus. If the vote doesn’t go your way though, you still support the decision. It was easier for Klaren and I to make decisions than it will be for the four of them. But, we’re a family who loves each other and business decisions need to be made. They will figure it out. And we’ve got to let them do it.
The next generation will have more opportunities than we did. They have impressive computer skills and learn new technology quickly. We wouldn’t be able to manage an operation of this size without them. They’re smart kids and they see the big picture. If we continue to keep the farm viable and intact, there’s no reason they can’t make it bigger and better together.
“You want to let the next
generation experience their
own successes and failures
as long as the failures don’t
cost too much money.”
– Klaren Koompin
Top left: Klaren and Kenny
Top right: Klaren, Kenny and Northwest FCS Relationship Manager Adam Teichert
Middle: Kael, Kamren and Klaren
Bottom left: Kenny, Adam and Klaren
Middle right: Pete, Kenny and Amanda
Kenny KoompinPartner
Koompin FarmsAmerican Falls, Idaho
Raises 8,200 acres of row crops including potatoes, wheat, barley and corn.
People say my brother and I are opposites – Klaren is the visionary and I keep our eyes on the ball. Dad passed away when we were young so everything we learned about farming after college was through trial and error. Our old high school coach encouraged us to grow and eventually became a silent partner. We weren’t necessar-ily expanding the operation for the next generation. We expanded to reach critical mass and economies of scale to be viable. Now the farm is in a position for our four kids to manage together.
Working with multiple cousins will be different than farming with a brother. Right now the kids have their own areas of responsibility, but we’re bringing them together to make decisions. We have a wide range of ages and experi-ences, too. Klaren’s oldest son Kamren, 33, has been here nine years since he graduated from college. His son Kael, 32, has worked eight years for us. My son Pete, 26, came back after he graduated in 2010 and my daughter Amanda, 27, joined us after college a year later. Given the ages, Kamren will be retiring when Pete has 10 years left in the business.
Today the kids are helping us track costs to the acre. They’ve all attended Northwest FCS financial workshops and we meet together with our relationship manager to review the budget. They understand the gross figures, but now we’re digging into the details. At some point we’ll need to turn responsibility over and let them make all the decisions. We’re not there yet, but we’re getting closer all the time.
“To be a viable business long term, you need a
competitive lender who shares your vision.”
– Klaren Koompin
9
Carrying the Legacy Forwardsister Sue Loband played an absolutely vital role as his personal representative, getting the business and related assets transitioned to Curt’s children while giving them space to grow into their roles. Outside professionals Curt worked with and trusted helped us navigate complicated tax and legal issues.
Initially, Matt, Angie and Mandi found themselves in roles that weren’t clearly defined or always comfortable. We started working
with a facilitator from Northwest FCS six months after Curt passed away and the planning process was a significant help to us. The family came together to create a unified vision for the business. We talked about strengths, weaknesses, their roles and where the family wanted to take the business going forward. The siblings are very loyal to each other, but there are honest differences of opinion too. We needed an outside facilitator to help them learn to communicate as partners, to ask tough questions and hold us all accountable to answer them.
I’m grateful for how much this family wanted to communicate and work together. Matt has really grown into his leadership role as general manager. He has a plan and is encouraging others while holding them accountable. Angie is a tremendous asset on the HR side, sharing her passion for people and relationships. Together they’ve earned the loyalty and respect of everyone who works here. Mandi isn’t involved in the day-to-day operations, but she has an important voice at the ownership table. These were the well-laid plans Curt Maberry made. He would be so pleased to see how his kids have grown as they care for the legacy he built.
“A strategic plan is only
as good as the paper it’s
written on unless someone
puts it into action.”
– Matt Maberry
Curt Maberry started working on a transition plan in 2005. He was 58 with two kids on the farm, Matt, 25 and Angie, 28. Oldest daughter Mandi, 30, was close to home pursuing her art career. Curt was expanding the crop side of the business and increasing production in the processing plant. His vision was to create a sustainable operation. None of us ever imagined he would pass away so suddenly just two years later.
Today Curt’s legacy lives on, reflected in the business he built, the relationships he made and the family he treasured. Curt loved sports, which influenced his management style. He always had an organized plan. He coached his employees, particularly his kids, to plan ahead and ex-ecute. Instead of telling people what to do he always asked them what the priorities were. He wanted everyone to think for themselves before he gave direction. His coaching management style made the transition easier when everyone stepped up quickly to contribute to the team.
Growing up, Matt, Angie and Mandi shared rich experiences working on and around the farm. Curt was intentional about putting them in different positions to learn the business. Matt and Angie were involved in the numbers early on, putting budgets together for the departments they worked in. Curt insisted on having regular business meetings to help them understand the financial cycles our industry goes through.
One of the most important things Curt did in estate planning was selecting the right people to put in places of responsibility. Curt’s
11
Top left: Northwest FCS Credit Officer Corrine Reynolds and Tom
Top right: Matt, Angie and Mandi
Middle: Matt, Angie, Mandi and Tom
Bottom left: Angie and Mandi
Bottom right: Angie and Matt
Tom VanBerkumBusiness Manager
Tom joined Curt Maberry Farm in 2005 after working for their public accounting firm.
Curt Maberry FarmLynden, Washington
Grows and processes nearly 1,000 acres of strawberries, red raspberries and blueberries.
“Northwest FCS provides
resources beyond just funding
loans. The business planning
services are truly valued
and appreciated.”
– Angie Maberry
Carrying the Legacy Forwardsister Sue Loband played an absolutely vital role as his personal representative, getting the business and related assets transitioned to Curt’s children while giving them space to grow into their roles. Outside professionals Curt worked with and trusted helped us navigate complicated tax and legal issues.
Initially, Matt, Angie and Mandi found themselves in roles that weren’t clearly defined or always comfortable. We started working
with a facilitator from Northwest FCS six months after Curt passed away and the planning process was a significant help to us. The family came together to create a unified vision for the business. We talked about strengths, weaknesses, their roles and where the family wanted to take the business going forward. The siblings are very loyal to each other, but there are honest differences of opinion too. We needed an outside facilitator to help them learn to communicate as partners, to ask tough questions and hold us all accountable to answer them.
I’m grateful for how much this family wanted to communicate and work together. Matt has really grown into his leadership role as general manager. He has a plan and is encouraging others while holding them accountable. Angie is a tremendous asset on the HR side, sharing her passion for people and relationships. Together they’ve earned the loyalty and respect of everyone who works here. Mandi isn’t involved in the day-to-day operations, but she has an important voice at the ownership table. These were the well-laid plans Curt Maberry made. He would be so pleased to see how his kids have grown as they care for the legacy he built.
“A strategic plan is only
as good as the paper it’s
written on unless someone
puts it into action.”
– Matt Maberry
Curt Maberry started working on a transition plan in 2005. He was 58 with two kids on the farm, Matt, 25 and Angie, 28. Oldest daughter Mandi, 30, was close to home pursuing her art career. Curt was expanding the crop side of the business and increasing production in the processing plant. His vision was to create a sustainable operation. None of us ever imagined he would pass away so suddenly just two years later.
Today Curt’s legacy lives on, reflected in the business he built, the relationships he made and the family he treasured. Curt loved sports, which influenced his management style. He always had an organized plan. He coached his employees, particularly his kids, to plan ahead and ex-ecute. Instead of telling people what to do he always asked them what the priorities were. He wanted everyone to think for themselves before he gave direction. His coaching management style made the transition easier when everyone stepped up quickly to contribute to the team.
Growing up, Matt, Angie and Mandi shared rich experiences working on and around the farm. Curt was intentional about putting them in different positions to learn the business. Matt and Angie were involved in the numbers early on, putting budgets together for the departments they worked in. Curt insisted on having regular business meetings to help them understand the financial cycles our industry goes through.
One of the most important things Curt did in estate planning was selecting the right people to put in places of responsibility. Curt’s
11
Top left: Northwest FCS Credit Officer Corrine Reynolds and Tom
Top right: Matt, Angie and Mandi
Middle: Matt, Angie, Mandi and Tom
Bottom left: Angie and Mandi
Bottom right: Angie and Matt
Tom VanBerkumBusiness Manager
Tom joined Curt Maberry Farm in 2005 after working for their public accounting firm.
Curt Maberry FarmLynden, Washington
Grows and processes nearly 1,000 acres of strawberries, red raspberries and blueberries.
“Northwest FCS provides
resources beyond just funding
loans. The business planning
services are truly valued
and appreciated.”
– Angie Maberry
Our Brand PromiseNorthwest Farm Credit Services is your
trusted source for financial solutions.
No other lender understands the agriculture,
food and fiber industries better and is more
committed to their future and that of
rural America.
N O R T H W E S T F A R M C R E D I T S E R V I C E S , A C A
REPORT OF MANAGEMENT The financial statements of Northwest Farm Credit Services, ACA and its wholly owned subsidiaries
(Northwest FCS) are prepared by management, who is responsible for their integrity and
objectivity, including amounts necessarily based on judgments and estimates. The financial
statements have been prepared in conformity with accounting principles generally accepted in the
United States of America, and, in the opinion of management, fairly present the financial condition
of Northwest FCS. Other financial information included in the 2013 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 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 that they have reviewed the 2013 Annual Report to Stockholders and it
has been prepared in accordance with all applicable statutory or regulatory requirements and the
information contained herein is true, accurate, and complete to the best of our knowledge and
belief.
Phil DiPofi
President and CEO
February 28, 2014
Tom Nakano
EVP-Chief Administrative and
Financial Officer
February 28, 2014
Karen Schott
Chair of the Board
February 28, 2014
2
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
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of Northwest FCS is responsible for establishing and maintaining adequate internal
control over financial reporting for Northwest FCS’ consolidated financial statements. For purposes
of this report “internal control over financial reporting” is defined as a process designed by or
under the supervision of Northwest FCS’ principal executives and principal financial officers, or
persons performing similar functions, and effected by its board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability of financial reporting
information and the preparation of the consolidated financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of America and
includes those policies and procedures that: (1) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of
Northwest FCS, (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial information, and that receipts and expenditures are being made
only in accordance with authorizations of management and directors of Northwest FCS, and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of Northwest FCS’ assets that could have a material effect on its consolidated
financial statements.
Northwest FCS’ management has completed an assessment of the effectiveness of internal control
over financial reporting as of December 31, 2013. In making the assessment, management used
the framework in Internal Control—Integrated Framework, promulgated by the Committee of
Sponsoring Organizations of the Treadway Commission, commonly referred to as the “COSO”
criteria.
Based on the assessment performed, Northwest FCS concluded that as of December 31, 2013, the
internal control over financial reporting was effective. Additionally, based on this assessment,
Northwest FCS determined there were no material weaknesses in the internal control over financial
reporting as of December 31, 2013. There were no material changes in the internal control over
financial reporting during the year ended December 31, 2013.
Northwest 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
February 28, 2014
Tom Nakano
EVP-Chief Administrative and
Financial Officer
February 28, 2014
Karen Schott
Chair of the Board
February 28, 2014
3
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 AUDIT COMMITTEE The Audit Committee is composed of seven members of the Northwest FCS Board of Directors. In
2013, the Audit Committee met five times in person and participated in four conference calls. The
Audit Committee oversees the scope of Northwest FCS’ internal audit program, the independence
of the outside auditors, the adequacy of Northwest FCS’ system of internal controls and procedures
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 2013. The Audit Committee’s
responsibilities are described more fully in the Internal Controls Policy and the Audit Committee
Operating Statement.
Management is responsible for internal controls and the preparation of the financial statements in
accordance with accounting principles generally accepted in the United States of America. PwC is
responsible for performing an independent audit of the financial statements in accordance with
generally accepted auditing standards in the United States of America and for issuing its report
based on the audit. The Audit Committee’s responsibilities include monitoring and overseeing these
processes.
In this context, the Audit Committee reviewed and discussed the audited financial statements for
the year ended December 31, 2013, with management. The Audit Committee also reviewed with
PwC the matters required to be discussed by Statement on Auditing Standards No. 114, as
amended (Communication with Audit Committees), PwC and the internal auditors directly provided
reports on significant matters to the Audit Committee.
The Audit Committee received the written disclosures and the letter from PwC in accordance with
Independence Standards Board Standard No. 1 (Independence Discussion with Audit Committees)
and discussed with PwC its independence. The Audit Committee requires prior approval of all non-
audit services provided by PwC. In 2013, PwC was engaged for a training related non-audit
service. The Audit Committee has discussed with management and PwC such other matters and
received such assurances from them as the Audit Committee deemed appropriate.
Based on the foregoing review and discussions, and relying thereon, the Audit Committee
recommended the Northwest FCS Board of Directors include the audited financial statements in the
annual report as of and for the year ended December 31, 2013.
Christy Burmeister-Smith
Chair of the Audit Committee
February 28, 2014
Drew Eggers
Jim Farmer
Mark Gehring
Dave Hedlin
John Helle
Shawn Walters
4
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
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
5
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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion summarizes the financial position and results of operations of Northwest
Farm Credit Services, an Agricultural Credit Association, and its wholly-owned subsidiaries
(collectively referred to as Northwest FCS) for the year ended December 31, 2013. The
commentary should be read in conjunction with the accompanying Consolidated Financial
Statements and Notes. The Consolidated Financial Statements were prepared under the oversight
of the Audit Committee.
Our quarterly and annual reports to shareholders may be obtained free of charge on our website,
www.northwestfcs.com or upon request at Northwest Farm Credit Services, ACA, P.O. Box 2515,
Spokane, Washington 99220-2515 or by telephone at (509) 340-5300 or toll free (800) 743-2125.
Dollar amounts are in thousands unless otherwise stated.
Forward-Looking Statements Certain statements contained in this report that are not historical facts are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act. Our actual results
may differ materially from those included in the forward-looking statements that relate to plans,
projections, expectations, and intentions. Forward-looking statements are typically identified by
words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “plan,” “project,” “may,”
“will,” “should,” “would,” “could” or similar expressions. Although we believe the information
expressed or implied in such forward-looking statements is reasonable, no assurance can be given
that such projections and expectations will be realized or the extent to which a particular plan,
projection, or expectation may be realized. These forward-looking statements are based on current
knowledge and are subject to various risks and uncertainties, including, but not limited to:
fluctuations in the agricultural, energy, international and leasing industry sectors; weather,
disease, and other adverse climatic or biological conditions that impact agricultural productivity and
income; United States and global economic conditions; sovereign or regulatory actions; the level of
interest rates; changes in assumptions underlying the valuations of financial instruments; changes
in estimates underlying the allowance for credit losses; economic conditions and credit
performance of the loan portfolio, growth and seasonal factors; tax reform; the effect of banking
and financial services reforms; possible amendments to, and interpretations of, risk-based capital
guidelines and reporting instructions; the ability of states to adopt more extensive consumer
privacy protections through legislation or regulation; the resolution of legal proceedings and
related matters; and nonperformance by counterparties to derivative positions.
Business Overview
Farm Credit System Structure and Mission
As of January 1, 2014 we are one of 78 associations in the Farm Credit System (System), which
was created by Congress in 1916 and has served agricultural producers for more than 95 years.
The System’s mission is to provide sound and dependable credit to American farmers, ranchers,
and producers or harvesters of aquatic products and farm-related businesses through a member-
owned cooperative system. This is done by making loans and providing financial services. Through
its commitment and dedication to agriculture, the System continues to have the largest portfolio of
agricultural loans of any lender in the United States. The Farm Credit Administration (FCA) is the
System’s independent safety and soundness federal regulator and was established to supervise,
examine and regulate System institutions.
Our Structure and Focus
As a cooperative, we are owned by the members we serve. The territory we serve extends across
a diverse agricultural region consisting primarily of Washington, Idaho, Oregon, Montana and
Alaska. We make long-term real estate mortgage loans to farmers, ranchers, rural residents, and
agribusinesses and production and intermediate-term loans for agricultural production or operating
purposes. Additionally, we provide related services to our customers, such as credit life insurance,
multi-peril crop and crop hail insurance and business management services. Our success begins
with our extensive agricultural experience and knowledge of the market and is dependent on the
level of satisfaction we provide our customers.
As part of the System, we obtain the funding for our lending and operations from CoBank, ACB
(CoBank), which is one of the four Farm Credit System Banks. CoBank is a cooperative of which we
are a member. CoBank, its related associations, and AgVantis Inc. (AgVantis) a technology service
corporation, are referred to as the District. Effective January 1, 2012, U.S. AgBank, FCB merged
with CoBank, FCB, a wholly owned subsidiary of CoBank. The merger did not impact the financial
position or presentation of financial information for Northwest FCS.
6
We, along with the customers’ investment in our association are materially affected by CoBank’s
financial condition and results of operations. The CoBank quarterly and annual reports are
available free of charge by accessing CoBank’s website, www.cobank.com, or may be obtained at
no charge by contacting us. Annual reports are available within 75 days after year end and
quarterly reports are available within 40 days after the calendar quarter end.
2013 Financial Highlights The year ended December 31, 2013 reflected strong financial performance. Record earnings and a
strong capital position allowed us to declare a cash patronage distribution of $58.1 million
representing a return of approximately 75 basis points for the majority of our eligible customers
based on their average 2013 loan balances. Other highlights include:
Net income for the year was $236,889, up 26.5 percent from 2012. The increase in net
income is driven mainly by significantly improved credit quality which resulted in credit loss
reversals of $34,677 as compared to a provision for credit losses recorded in 2012 of
$30,490.
Capital levels remained strong and well in excess of regulatory minimums. As of December
31, 2013, our members’ equity totaled approximately $1.8 billion, and our members’ equity as
a percentage of total assets was 18.3 percent.
Our loan portfolio volume increased modestly in 2013, with an ending gross loan and accrued
interest balance of $9.2 billion. During the same period our nonaccrual loan volume
significantly declined by $83,690, a decrease of 49.2 percent.
Commodity Review and Outlook The following highlights the general health of agricultural commodities with the greatest
concentrations in our loan portfolio.
Dairy: After enduring negative profit margins for much of the year, dairy producers closed 2013
with strong profit margins fueled by rising milk prices, falling corn prices, and historically high U.S.
dairy exports. Milk prices are expected to remain strong in 2014, but could be pressured by
increased competition in global export markets. Milk production in New Zealand and the European
Union is expected to increase. Although lower feed costs are expected to support dairy producers’
profit margins, prices for soybean meal, alfalfa, and other feed ingredients remain high relative to
declines in corn prices.
Forest Products: Volatility in pricing and demand continues in the forest products industry.
Competition between domestic mills and export buyers is driving log prices higher. In areas of the
Northwest, log prices exceed levels associated with the height of the housing boom. In the lumber
and panel markets, mills have experienced periods of strong price increases followed by steep
downward corrections. This volatility complicates management decisions, particularly in an
environment of rising log costs. U.S. fiber consumption is expected to grow in 2014, driven
primarily by increases in housing starts. However, price volatility is expected to continue, fueled by
changes in supply chain inventory levels and mill capacity utilization.
Cattle and Livestock: The principal commodity we finance in this sector is beef cattle. Cattle
markets continue to strengthen. Prices for feeder and fed cattle are at record levels. Falling feed
prices are the most significant variable supporting feeder cattle prices. With improved profit
margins, feedlots are bidding up prices in order to secure inventory. Tight supplies will continue to
support cattle prices for the foreseeable future. Global and domestic beef demand is strong,
further supporting prices. However, continued beef price increases may challenge consumer
demand.
Fruit and Tree Nuts: The principal commodity we finance in this sector is apples. The outlook for
the Northwest apple industry is tempered from last season. For the 2013-2014 crop season, the
second largest crop in Northwest history is matched with a rebound in the North American apple
crop. Increased supplies are weighing on markets. Northwest apples are experiencing high cullage
due to internal condition issues. Affected fruit is not acceptable in the fresh market, which is
impacting returns for both growers and packers. Apple prices, while generally profitable, have
been pressured lower. Prices are expected to firm in the first quarter of 2014 and stay strong
through the marketing season.
Grains: The principal commodity we finance in this sector is wheat. Northwest wheat producers
face a changing marketplace entering 2014. Wheat market fundamentals are bearish, pressured by
rising global stocks and weak cross-market support from corn. Although U.S. wheat production
was down in the 2013-2014 crop season, worldwide wheat stocks rose. Stronger near-term prices
are unlikely without a supply disruption. Lower corn prices are generally pressuring grain prices,
and ample corn supplies are reducing the amount of wheat used as feed. Profitability for wheat
producers will be challenged in 2014 given falling prices. However, strong profits in recent years
have bolstered wheat producers’ ability to bear downside risk.
7
Potatoes: Northwest fresh potato prices have improved considerably from the prior year. Lower
potato production in the United States and the Northwest is supporting the market. Fall frosts
negatively impacted the storability of potatoes in some areas. Where storage issues are not a
concern, producers are delaying open market potato sales, anticipating stronger prices later in the
season. Overall, potato growers are expected to be profitable for their 2013 crop.
For more information on our industries served visit the Northwest FCS Knowledge Center at
www.northwestfcs.com.
Loan Portfolio Total loans and accrued interest outstanding were $9.2 billion at December 31, 2013, an increase
of $162,398, or 1.8 percent from the December 31, 2012 balance of $9.1 billion. During 2012, total
loans and accrued interest increased $525,859 million or 6.2 percent, from $8.5 billion at
December 31, 2011.
In 2013, the modest growth in the portfolio is a result of strong customer liquidity and less
dependence on operating funding. In 2012, our growth came primarily from existing customer
expansion in land and capital improvements.
Loans and accrued interest by type are presented in the following table:
Loan concentrations by state are presented in the following table:
Gross loans, impaired loans and related accrued interest, where appropriate, are presented in the
following table:
Total impaired loans and interest decreased $93,010, or 41.6 percent, during the year ended
December 31, 2013 as compared to December 31, 2012. The majority of this decrease was related
to nonaccrual loans, which decreased $83,690 or 49.2 percent, as compared with December 31,
2012. The following table reflects activity within the nonaccrual loan portfolio:
As of December 31, 2013, nonaccrual loans that were current as to principal and interest
installments totaled $77,785 representing 89.9 percent of the nonaccrual loan portfolio compared
to $125,206 representing 73.5 percent of the nonaccrual loan portfolio at December 31, 2012, and
8
$178,550 representing 73.4 percent of the nonaccrual loan portfolio at December 31, 2011.
Additional loan information is in Note 3 to the Consolidated Financial Statements.
Allowance for Credit Losses The allowance for credit losses is comprised of the allowance for loan losses (ALL) and the reserve
for unfunded lending commitments. The allowance for credit losses is our best estimate of the
amount of probable losses inherent in our loan portfolio at the balance sheet date. The allowance
for credit losses is determined based on a periodic evaluation of the loan portfolio and unfunded
lending commitments, which generally considers types of loans, credit quality, specific industry
conditions, general economic and political conditions, 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 various risk characteristics of our
loan portfolio. We evaluate the reasonableness of this model and determine whether adjustments
to the allowance are appropriate to reflect the risks inherent in the portfolio.
Individual loans are evaluated based on the borrower’s overall financial condition, resources, and
payment history; the prospects for support from any financially responsible guarantor; and, if
appropriate, the estimated net realizable value of any collateral. The allowance for loan losses
attributable to these loans is established by a process that estimates the probable loss inherent in
the loans, taking into account various historical and projected factors, internal risk ratings,
regulatory oversight, geographic location, industry and other factors.
We maintain a reserve on unfunded commitments. The reserve reflects our best estimate of losses
inherent in lending commitments made to customers but not yet disbursed. Factors such as the
likelihood of disbursements and the likelihood of losses given disbursement are utilized in
determining this reserve. This reserve is reported within Other liabilities on the Consolidated
Balance Sheet and totaled $15,000 at December 31, 2013 and $12,000 at December 31, 2012 and
2011.
The ALL reserves at December 31, 2013, 2012, and 2011 totaled $97,000, $128,000, and
$126,500, respectively. Specific loan loss reserves at December 31, 2013, 2012, and 2011 totaled
$16,405, $47,971, and $31,679, respectively. For each of these respective years, the specific
reserve was primarily comprised of those relationships within the agricultural sectors which were
impacted by volatility in commodity and input prices, such as dairy, as well as those industries,
such as nursery, that were impacted by the overall downturn in the U.S. economy.
Coverage of the ALL, as a percentage of certain key loan categories, is presented in the following
table:
Results of Operations Our net income for the year ended December 31, 2013, was $236,889, compared to $187,255 for
2012 and $159,156 for 2011. The following table provides detail of changes in the components of
our net income:
Net Interest Income: Net interest income was $3,816 lower in 2013 compared to 2012
primarily due to a decrease in loan spread caused in part by greater prepayment expense,
competitive pressures and an increase in the average loan volume in lower spread lines of
business. Net interest income was $6,472 higher in 2012 compared to 2011 primarily due to an
increase in average loan volume, increased income from nonaccrual loans and a decrease in the
cost of funds. The cost of funds was impacted by the composition of the balance sheet and the
amount of equity available to fund loan volume. These items were partially offset by a decrease in
loan spread caused in part by greater prepayment expense, competitive pressures, and lower
interest rates.
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, 2013, and
2012, and between the years ended December 31, 2012 and 2011, are presented in the following
table:
Information regarding the average daily balances and average rates earned and paid on our
portfolio are presented in the following table:
Reversal of/Provision for credit losses: In 2013, credit quality improved significantly as
shown by the reduction in nonaccrual loans. Additionally, net recoveries of $6,677 were recorded
in 2013. Both of these resulted in a credit loss reversal in 2013. In the prior two years, our charge-
offs, nonaccrual loans, and adverse loans were higher than historical averages, and resulted in
larger provisions for credit losses. Charge-offs net of recoveries totaled $28,990 and $26,841 in
2012 and 2011, respectively, and were concentrated in the dairy and nursery sectors.
Noninterest income: The decrease in noninterest income of $10,225 in 2013 when compared to
2012 was primarily due to a $11,238 refund received in 2012 from the Farm Credit System
Insurance Corporation (Insurance Corporation) related to the Farm Credit Insurance Fund
(Insurance Fund). As described in Note 1 to the Consolidated Financial Statements when the
Insurance Fund exceeds the statutory 2 percent secure base amount, the Insurance Corporation
evaluates the insurance premium assessment rate for Farm Credit System banks and may refund
excess amounts. The Insurance Fund ended 2011 above the secure base amount, and
consequently in the second quarter of 2012, the Insurance Corporation distributed to Farm Credit
entities the excess amount. No similar refunds were received in 2013 or 2011. These refunds are
recorded in Other income on the Consolidated Statement of Income. Financially related services
decreased $2,155, or 13.8 percent as compared to 2012 related mainly to $2,147 received in 2012
from profit sharing with insurance companies. Similar profit sharing with insurance companies was
not recognized in 2013 or 2011.
Operating expense: In 2013, operating expenses increased by $5,121 when compared to 2012.
Factors causing higher operating expenses when compared to the previous year were increased
Insurance Fund premiums of $3,190, related to the assessment rate increasing, purchased services
of $2,626, and salaries and benefits of $2,612. Purchased services increased primarily due to
technology services we purchase from Financial Partners, Inc. as well as costs associated with
contract labor for a new loan accounting system. Salaries and benefits were higher than in the
previous year due to normal annual salary increases and incentive expenses related to 2013
performance. These increases were partially offset by a decrease in occupancy and equipment
expense associated with certain assets that were fully depreciated in the prior year. Additionally,
the reversal of a portion of the contingent liability recorded previously related to revenue taxes
resulted in a reduction of operating expenses in 2013 of $1,638.
Operating expenses increased by $9,000 in 2012 compared to 2011. The change is related mainly
to salaries and benefits which increased $10,620 as compared to the prior year. Salaries and
benefits include normal annual salary increases, increased incentive and defined benefit plan
expenses. This increase was partially offset by a decrease in other operating expense of $2,008
when compared to 2011. This decrease is attributed to higher deferred loan origination costs and a
decline in credit enhancement premiums as compared to the prior year. Other operating expense
also included an additional $1,000 related to a previously existing contingent liability related to
revenue taxes. Decreases in operating expenses were in occupancy and equipment and insurance
fund premiums.
Provision for income taxes: Income tax expense was $2,468 lower than in the previous year.
The effective tax rate was 2.9 percent for the year ended December 31, 2013 as compared to 4.8
percent for 2012. Contributing to the reduction was the reversal of the $1,000 uncertain tax
10
position recorded in the prior year as the uncertainty related to the state tax position has been
resolved. The remaining reduction in taxes is primarily related to a reduction in the income from
non-patronage sourced business in our taxable entity as compared to the prior year. The tax
expense in 2012 increased $3,143 as compared to 2011. Contributing to the increase was a $1,000
uncertain tax position recorded in the year ended December 31, 2012 referred to above. The
remaining increase in the provision for tax expense in 2012 as compared to 2011 was primarily
related to non-patronage sourced income from our taxable entity.
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, this direct loan is governed by a General Financing Agreement
(GFA) and is collateralized by a pledge of substantially all of our assets and is also subject to
regulatory borrowing limits. The GFA includes financial and credit metrics that if not maintained
can result in increases to our funding costs. The GFA also requires us to comply with FCA
regulations regarding liquidity. To meet this requirement, we are allocated a share of CoBank’s
liquid assets. We are currently in compliance with the GFA and do not foresee issues with
obtaining funding or maintaining liquidity.
We plan to continue to fund lending operations primarily through the utilization of our borrowing
relationship with CoBank and retained earnings. CoBank’s primary source of funds is the ability to
issue Systemwide Debt Securities to investors through the Federal Farm Credit Bank Funding
Corporation. This access has traditionally provided a dependable source of competitively priced
debt that is critical for supporting our mission of providing credit to agriculture and rural America.
We have a secondary source of liquidity and funding through an uncommitted Federal Funds line
of credit with Wells Fargo. The amount available through this line is $75,000 and is intended to
provide liquidity for disaster recovery or other emergency situations. At December 31, 2013, no
balance was outstanding on this line of credit.
Asset/Liability Management In the normal course of lending activities, we are subject to interest rate risk. Our asset/liability
management objective is monitored and managed within interest rate risk limits designed to target
reasonable stability in net interest income over an intermediate planning horizon and to preserve a
relatively stable market value of equity over the long term. Mismatches and exposure in interest
rate repricing and indices of assets and liabilities can arise from product structures, customer
activity, capital re-investment, and liability management. While we actively manage interest rate
risk within the policy limits approved by the Board of Directors through the strategies established
by the Asset/Liability Committee (ALCO), there is no assurance that these mismatches and
exposures will not adversely impact our earnings and capital. Our overall objective is to develop
appropriately priced and structured loan products for our customers’ benefit and fund these
products with a blend of equity and debt obligations.
The interest rate gap analysis shown in the following table presents a comparison of interest-
earning assets and interest-bearing liabilities in defined time segments at December 31, 2013. The
interest rate gap analysis is a static indicator for how we are positioned by comparing the amount
of our assets and liabilities that reprice at various time periods in the future. The value of this
analysis can be limited given other factors such as the differences between interest rate indices on
loans and the underlying funding, the relative changes in the levels of interest rates over time, and
optionality included in loans and the respective funding that can impact future earnings and
market value.
Northwest FCS’ repricing gap as of December 31, 2013 is characterized as slightly asset sensitive.
An asset sensitive position is favorable to the association in a rising rate environment and is less
11
favorable when interest rates are declining. Given some of the inherent weaknesses with interest
rate gap analysis, simulation models are used to develop additional interest rate sensitivity
measures and estimates. The assumptions used to produce anticipated results are periodically
reviewed and models are tested to help ensure reasonable performance. Various simulations are
produced for net interest income and the market value of equity. These simulations help us assess
interest rate risk and make adjustments as needed to our products and related funding strategies.
Our interest rate risk management board policy establishes limits for changes in net interest
income and market value of equity sensitivities. These limits are measured and reviewed by the
ALCO monthly and reported to the Board of Directors at least quarterly. The Board policy limits for
net interest income and the market value of equity are a negative 15 percent change given parallel
and instantaneous shocks of interest rates up and down 2 percent. If the three-month Treasury bill
interest rate is less than 4 percent, then the downward shock is equal to one-half of the three-
month Treasury rate. The GFA 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 2013, the 1 and 2 percent parallel and instantaneous downward shock scenarios
cannot be obtained. The downward interest rate shock in the preceding table was near zero.
As of December 31, 2013, all interest rate risk-related measures were within Board policy limits,
GFA requirements, and management guidelines.
Members’ Equity We have a capitalization objective to build and retain adequate members’ equity for our continued
financial viability and to provide for growth necessary to competitively meet the needs of our
customers. In assessing the amount of capital needed, we take into account credit risk, funding
and interest rate risks, contingent and off-balance sheet liabilities and other conditions warranting
additional capital. As part of our capitalization plan we evaluate the financial benefits and costs of
using credit default swaps and other transactions. These transactions protect us against credit
losses and enhance our capital ratios. These transactions amortize down so financial benefits
diminish over time.
For the year ended December 31, 2013, total members’ equity increased $190,701 or 12.2 percent
from December 31, 2012. The increase in members’ equity was primarily due to earnings of
$236,889 and an increase in other comprehensive income of $12,172, partially offset by patronage
payable of $58,134.
As displayed in the following table, at December 31, 2013, 2012, and 2011, 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 2014. See Note 8 to the Consolidated Financial Statements for further discussion of these
regulatory ratios.
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
Phil DiPofi
President and CEO
February 28, 2014
Tom Nakano
EVP-Chief Administrative and
Financial Officer
February 28, 2014
Karen Schott
Chair of the Board
February 28, 2014
12
REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders
of Northwest Farm Credit Services
We have audited the accompanying consolidated financial statements of Northwest Farm Credit
Services, ACA and its subsidiaries (the Association), which comprise the consolidated balance
sheets as of December 31, 2013, 2012 and 2011, and the related consolidated statements of
income, of comprehensive income, of changes in members’ equity and of cash flows for the years
then ended. We also have audited the Association’s internal control over financial reporting as of
December 31, 2013 based on criteria established in Internal Control - Integrated Framework
(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Management's Responsibility The Association's management is responsible for the preparation and fair presentation of the
consolidated financial statements in accordance with accounting principles generally accepted in
the United States of America, for maintaining internal control over financial reporting including the
design, implementation, and maintenance of controls relevant to the preparation and fair
presentation of the consolidated financial statements that are free from material misstatement,
whether due to error or fraud, and for its assertion about the effectiveness of internal control over
financial reporting, included in the Report on Internal Control over Financial Reporting appearing in
this Annual Report.
Auditor's Responsibility Our responsibility is to express an opinion on the consolidated financial statements and an opinion
on the Association’s internal control over financial reporting based on our integrated audits. We
conducted our integrated audits in accordance with the auditing standards of the Public Company
Accounting Oversight Board (United States) and in accordance with the auditing and attestation
standards established by the American Institute of Certified Public Accountants. Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free from material misstatement and whether effective
internal control over financial reporting was maintained in all material respects.
An audit of financial statements involves performing procedures to obtain audit evidence about the
amounts and disclosures in the consolidated financial statements. The procedures selected depend
on our judgment, including assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk assessments, we consider
internal control relevant to the company's preparation and fair presentation of the consolidated
financial statements in order to design audit procedures that are appropriate in the circumstances.
An audit of internal control over financial reporting involves obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that the audit evidence we obtained is sufficient and appropriate to
provide a basis for our opinions.
Definition and Inherent Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process effected by those charged with
governance, management, and other personnel, designed to provide reasonable assurance
regarding the preparation of reliable financial statements in accordance with accounting principles
generally accepted in the United States of America. 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 those charged with governance; and
(iii) provide reasonable assurance regarding prevention or timely detection and correction 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 and correct misstatements. Also, projections of any evaluation of effectiveness to future
13
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the Association at December 31, 2013, 2012, and 2011, and the
results of its operations and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the Association
maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2013, based on criteria established in Internal Control - Integrated Framework
(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
February 28, 2014
PricewaterhouseCoopers LLP, Three Embarcadero San Francisco, California 94111
14
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
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
17
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
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS’ EQUITY
18
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
CONSOLIDATED STATEMENT OF CASH FLOWS
19
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except as noted)
NOTE 1 > Organization and Operations
Organization
Northwest Farm Credit Services, ACA and its subsidiaries, Northwest Farm Credit Services, FLCA
(the Federal Land Credit Association (FLCA)) and Northwest Farm Credit Services, PCA (the
Production Credit Association (PCA)), (collectively referred to as Northwest FCS) is a member-
owned cooperative that provides credit and financially related services to or for the benefit of
eligible customers primarily in the states of Washington, Idaho, Oregon, Montana and Alaska.
Northwest FCS is a lending institution of the Farm Credit System (the System), a nationwide
system of cooperatively owned banks and associations, which was established by Acts of Congress
to meet the credit needs of American agriculture and rural America and is subject to the provisions
of the Farm Credit Act of 1971, as amended (the Farm Credit Act). At January 1, 2014, the System
was comprised of three Farm Credit Banks, one Agricultural Credit Bank, and 78 associations.
CoBank, ACB (CoBank or Bank), its related associations, and AgVantis Inc. (AgVantis) a technology
service corporation, are referred to as the District. The Bank provides the funding to associations
within the District and is responsible for supervising certain activities of the District associations.
Effective January 1, 2012, U.S. AgBank, FCB merged with CoBank, FCB, a wholly owned subsidiary
of CoBank, ACB. The merger did not impact the financial position or presentation of financial
information for Northwest FCS. As of December 31, 2013, the District consists of the Bank and 27
Agricultural Credit Associations (ACA), which each have two wholly owned subsidiaries, (an FLCA
and a PCA), two FLCAs and AgVantis.
ACA parent companies provide financing and related services through their FLCA and PCA
subsidiaries. The FLCA makes secured long-term agricultural real estate and rural home mortgage
loans. The PCA makes short- and intermediate-term loans for agricultural production or operating
purposes.
Northwest FCS, along with other System institutions, owns Farm Credit Financial Partners, Inc.
(FPI), a dedicated service corporation that provides information technology solutions for various
Farm Credit entities. At December 31, 2013, Northwest FCS owned approximately 15 percent of
FPI.
In 2011, Northwest FCS began participating in AgDirect, LLP (AgDirect), a trade credit financing
program which includes origination and re-financing of agricultural equipment loans through
independent equipment dealers. The program is facilitated by a limited liability partnership in
which Northwest FCS is a partial owner. At December 31, 2013, Northwest FCS owned
approximately 12 percent of AgDirect.
Effective September 1, 2012, Northwest FCS joined an alliance with nine other Farm Credit
partners to provide financing for agribusiness companies under the trade name, ProPartners
Financial (ProPartners). ProPartners participates with crop input suppliers nationwide to create
financing programs for their customers. Upon joining ProPartners, Northwest FCS became a
participant in 25.75 percent of future loan volume. ProPartners is directed by representatives from
the participating associations. The income, expense and loss sharing agreements are based on
each association’s participation interest in ProPartners’ loan volume, which is established according
to a prescribed formula which includes the risk funds of the associations.
The Farm Credit Administration (FCA) is delegated authority by Congress to regulate the System
banks and associations. The FCA examines the activities of System institutions to ensure their
compliance with the Farm Credit Act, FCA regulations and safe and sound banking practices.
The Farm Credit Act established the Farm Credit System Insurance Corporation (Insurance
Corporation) to administer the Farm Credit Insurance Fund (Insurance Fund). By law, the
Insurance Fund is required to be used (1) to ensure the timely payment of principal and interest
on Systemwide debt obligations (Insured Debt), (2) to ensure the retirement of protected stock at
par or stated value, and (3) for other specified purposes. The Insurance Fund is also available for
discretionary use by the Insurance Corporation in providing assistance to certain troubled System
institutions and to cover the operating expenses of the Insurance Corporation. Each System bank
is required to pay premiums, which may be passed on as an expense to the associations, into the
Insurance Fund based on its annual average outstanding insured debt adjusted to reflect the
reduced risk on loans or investments guaranteed by federal or state governments until the assets
in the Insurance Fund reach the “secure base amount”, which is defined in the Farm Credit Act as
2 percent of the aggregate Insured Debt or such other percentage of the aggregate obligations as
20
the Insurance Corporation, in its sole discretion, determines to be actuarially sound. When the
amount in the Insurance Fund exceeds the secure base amount, the Insurance Corporation is
required to reduce premiums, as necessary to maintain the Insurance Fund at the 2 percent level.
As required by the Farm Credit Act, as amended, the Insurance Corporation may return excess
funds above the secure base amount to System institutions. The Bank passes this premium
expense and the return of excess funds as applicable, through to each association based on the
association’s average adjusted note payable balance with the Bank.
Operations
The Farm Credit Act sets forth the types of authorized lending activity, persons eligible to borrow,
and financial services that Northwest FCS can offer. Northwest FCS is authorized to provide, either
directly or in participation with other lenders, credit, credit commitments, and related services to
eligible customers. Eligible customers include farmers, ranchers, producers or harvesters of aquatic
products, rural residents, and farm-related businesses.
Northwest FCS also serves as an intermediary in offering credit life insurance and multi-peril crop
insurance and provides additional services to customers such as fee appraisals and business
management services.
Northwest FCS’ financial condition may be impacted by factors that affect CoBank. The CoBank
Annual Report is available free of charge on CoBank’s website, www.cobank.com; or may be
obtained at no charge by contacting Northwest FCS, P.O. Box 2515, Spokane, Washington 99220-
2515, or by telephone at (509) 340-5300, toll free (800) 743-2125, as well as upon request at any
Northwest FCS office location. Upon request, stockholders of Northwest FCS will be provided with a
copy of the CoBank Annual Report, which includes the combined balance sheet and income
statements of CoBank and its related associations, and AgVantis. The CoBank Annual Report
discusses the material aspects of the Bank’s and District’s financial condition, changes in financial
condition, and results of operations.
NOTE 2 > Summary of Significant Accounting Policies The accounting and reporting policies of Northwest FCS conform to accounting principles generally
accepted in the United States of America (GAAP) and prevailing practices within the banking
industry. The preparation of financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results may differ from these estimates. Significant
estimates are discussed in the footnotes, as applicable. 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 inter-company transactions have been
eliminated in consolidation.
Recently Issued or Adopted Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (FASB) issued guidance entitled,
“Balance Sheet – Disclosures about Offsetting Assets and Liabilities.” The guidance requires an
entity to disclose information about offsetting and related arrangements to enable users of its
financial statements to understand the effects of those arrangements on its financial position. This
includes the effect or potential effect of rights of setoff associated with an entity’s recognized
assets and recognized liabilities. The requirements apply to recognized financial instruments and
derivative instruments that are offset in accordance with the rights of offset as stated in
accounting guidance and for those recognized financial instruments and derivative instruments that
are subject to an enforceable master netting arrangement or similar agreement, irrespective of
whether they are offset or not. This guidance is to be applied retrospectively, for all comparative
periods and is effective for annual reporting periods beginning on or after January 1, 2013, and
interim periods, within those annual periods. The adoption of this guidance did not impact the
financial condition or results of operations, and did not result in additional disclosures in the
current year.
In February 2013, the FASB issued guidance entitled, “Reporting Amounts Reclassified out of
Accumulated Other Comprehensive Income.” The guidance requires entities to present either
parenthetically on the face of the financial statements or in the notes to the financial statements,
significant amounts reclassified from each component of accumulated other comprehensive income
and the income statement line items affected by the reclassification. The guidance is effective for
public entities for annual periods beginning after December 15, 2012 and for nonpublic entities for
annual periods beginning after December 15, 2013. The adoption of this guidance did not impact
the financial condition or results of operations and resulted in additional disclosures.
21
Significant Accounting Policies
Cash
Cash, as included in the statement of cash flows, represents cash on hand and on deposit at
financial institutions.
Investment Securities
Northwest FCS may hold investments in accordance with mission-related investment and other
investment programs approved by the Farm Credit Administration. These programs allow
Northwest FCS to make investments that further the System’s mission to serve rural America.
Mission-related investments for which Northwest FCS has the intent and ability to hold to maturity
are classified as held-to-maturity and carried at cost, adjusted for the amortization of premiums
and accretion of discounts.
Loans and Allowance for Credit Losses
Long-term real estate mortgage loans generally have original maturities ranging up to 40 years,
although the typical loan is 25 years or less. Short- and intermediate-term loans for agricultural
production or operating purposes generally have maturities of 10 years or less. Loans are carried
at their principal amount outstanding adjusted for charge-offs, deferred loan fees or costs, and
purchase premiums or discounts. Interest on loans is accrued and credited to interest income
based upon the daily principal amount outstanding. Loan origination fees and direct loan
origination costs are capitalized, and the net fee or cost is amortized over the estimated life of the
related loan as an adjustment to yield.
Impaired loans are loans for which it is probable that not all principal and interest will be collected
according to the contractual terms of the loan and are generally considered substandard or
doubtful, which is in accordance with the loan rating model, as described below. Impaired loans
include nonaccrual loans, restructured loans, and loans past due 90 days or more and still accruing
interest. A loan is considered contractually past due when any principal repayment or interest
payment required by the loan instrument is not received on or before the due date. A loan shall
remain contractually past due until it is formally restructured or until the entire amount past due,
including principal, accrued interest, and penalty interest incurred as the result of past due status,
is collected or otherwise discharged in full.
Impaired loans are generally placed in nonaccrual status when principal or interest is delinquent
for 90 days or more (unless adequately secured and in the process of collection) or circumstances
indicate that collection of principal and/or interest is in doubt. When a loan is placed in nonaccrual
status, accrued interest deemed uncollectible is reversed (if accrued in the current year) and/or
charged against the allowance for loan losses (if accrued in the prior year). Loans are charged off
at the time they are determined to be uncollectible.
A restructured loan constitutes a troubled debt restructuring if for economic or legal reasons
related to the debtor’s financial difficulties, Northwest FCS grants a concession to the debtor that it
would not otherwise consider to be a market transaction. Such concessions may include monetary
concessions or other modifications to the contractual terms of the loan. If the borrower’s ability to
meet the revised payment schedule is uncertain, the loan is classified as a nonaccrual loan.
When loans are in nonaccrual status, loan payments are generally applied against the recorded
nonaccrual balance. A nonaccrual loan may, at times, be maintained on a cash basis. As a cash
basis nonaccrual loan, the recognition of interest income from cash payments received is allowed
when the collectability of the recorded investment in the loan is no longer in doubt and the loan
does not have a remaining unrecovered charge-off associated with it. Nonaccrual loans may be
returned to accrual status when all contractual principal and interest are current, the borrower has
demonstrated payment performance, there are no unrecovered prior charge-offs, and collection of
future payments is no longer in doubt. If previously unrecognized interest income exists at the
time the loan is transferred to accrual status, cash received at the time of or subsequent to the
transfer is first recorded as interest income until such time as the recorded balance equals the
contractual indebtedness of the borrower.
Northwest FCS purchases loan and lease participations from other System and non-System entities
to generate additional earnings and diversify risk related to existing commodities financed and the
geographic areas served. Additionally, Northwest FCS sells a portion of certain large loans to other
System and non-System entities to reduce risk and comply with established lending limits. Loans
are sold following accounting requirements for sale treatment.
Northwest FCS uses a two-dimensional loan rating model based on internally generated combined
system risk rating guidance that incorporates a 14-point scale to identify and track the probability
of borrower default and a separate scale addressing loss given default over a period of time.
Probability of default is the probability that a borrower will experience a default within 12 months
from the date of the determination of the risk rating. A default is considered to have occurred if
the lender believes the borrower will not be able to pay its obligation in full or the borrower is past
due more than 90 days. The loss given default is management’s estimate as to the anticipated
22
economic loss on a specific loan assuming default has occurred, or is expected to occur within the
next 12 months.
Each of the probability of default categories carries a distinct likelihood of default. The 14-point
scale provides for granularity of the probability of default, especially in the acceptable ratings.
There are nine acceptable categories that range from a loan of the highest quality to a loan of
minimally acceptable quality. The probability of default between 1 and 9 is very narrow and would
reflect almost no default to a minimal default percentage. The probability of default grows more
rapidly as a loan moves from a “9” to other assets especially mentioned (10) and grows
significantly as a loan moves to a substandard level (11). A substandard rating indicates that the
probability of default is high.
The allowance is increased through provisions for loan losses and loan recoveries and is decreased
through reversals of provisions for loan losses and loan charge-offs. The allowance 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 based on a periodic evaluation of
the loan portfolio by management, in which numerous factors are considered, including economic
conditions, loan portfolio composition, collateral value, portfolio quality, current production
conditions, and prior loan loss experience. The allowance for loan losses encompasses various
judgments, evaluations and appraisals with respect to the loans and their underlying security that,
by their nature, contain elements of uncertainty, imprecision and variability. Changes in the
agricultural economy and environment, and their impact on borrower repayment capacity, will
cause various judgments, evaluations and appraisals to change over time. Accordingly, actual
circumstances could vary significantly from Northwest FCS’ expectations and predictions of those
circumstances. Management considers the following factors in determining and supporting the
level of allowance for loan losses: the concentration of lending in agriculture, combined with
uncertainties associated with farmland values, commodity prices, exports, government assistance
programs, regional economic effects and weather-related influences.
The allowance for loan losses includes components for loans individually evaluated for impairment
and loans collectively evaluated for impairment. Generally, loans individually evaluated in the
allowance for loan losses represent the difference between the recorded investment in the loan
and the present value of the cash flows expected to be collected, discounted at the loan’s effective
interest rate, or at the fair value of the collateral, if the loan is collateral dependent. For those
loans collectively evaluated for impairment, the allowance for loan losses is determined using an
estimate of expected losses based on historical experience for similar loans.
The reserve for unfunded lending commitments is based on management’s best estimate of losses
inherent in lending commitments made to customers but not yet disbursed. Factors such as
likelihood of disbursal and likelihood of losses given disbursement were utilized in determining this
contingency.
Investment in CoBank, ACB
Northwest FCS' required investment in CoBank is in the form of Class A stock. The minimum
required investment is 4 percent of the prior year’s average direct loan volume. In addition,
Northwest FCS is required to capitalize its patronage-based participation loans sold to CoBank at 8
percent of Northwest FCS’ prior ten-year average balance of such participations sold to CoBank.
The investment in CoBank is composed of stock received as patronage and purchased stock.
Accounting for this investment is on the cost plus allocated equities basis. Northwest FCS owned
approximately 12 percent of the outstanding common stock of CoBank at December 31, 2013.
Other Property Owned
Other property owned, consisting of real and personal property acquired through foreclosure or
deed in lieu of foreclosure, is recorded at fair value less estimated selling costs upon acquisition.
Any initial reduction in the carrying amount of a loan to the fair value of the collateral received is
charged to the allowance for loan losses. On at least an annual basis, revised estimates to the fair
value are reported as adjustments to the carrying amount of the asset, provided that such
adjusted value is not in excess of the carrying amount at acquisition. Income and expenses from
operations, losses on sales and carrying value adjustments are included in other expense on the
Consolidated Statement of Income. Gains on sales are included in other income on the
Consolidated Statement of Income.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation. Land is carried at cost.
Depreciation is provided on the straight-line method over the estimated useful lives of the assets.
Gains and losses on dispositions are reflected in current operations. Maintenance and repairs are
charged to operating expense and significant improvements are capitalized.
Advanced Conditional Payments
Northwest FCS is authorized under the Farm Credit Act to accept advance payments from
borrowers, which are classified as advance conditional payments and other interest-bearing
liabilities on the Consolidated Balance Sheet. Advanced conditional payments are not insured.
Interest is paid by Northwest FCS on such accounts.
23
Employee Benefit Plans
Substantially all employees of Northwest FCS participate in its Defined Benefit Pension Plan
(Pension Plan) or the Farm Credit Foundations Defined Contribution/401(k) Retirement Plan
(Defined Contribution Plan). Enrollment in the Pension Plan was curtailed in 1994. Existing
employees who elected to transfer out of the Pension Plan and all new employees hired after
December 31, 1994, participate in the Defined Contribution Plan. The Pension Plan uses the “Entry
Age Normal Cost” actuarial method for funding purposes and the “Projected Unit Credit” actuarial
method for financial reporting purposes.
The Defined Contribution Plan has two components. In this plan, Northwest FCS provides a
monthly contribution based on a defined percentage of the employee’s salary. Employees may also
defer a portion of their salaries in accordance with Section 401(k) of the Internal Revenue Code to
which Northwest FCS matches a certain percentage of employee contributions. Defined
contribution costs are expensed in the same period that participants earn employer contributions
and employer matching costs are expensed as funded.
Certain management or highly compensated employees who participate in the Pension plan also
participate in a nonqualified Defined Benefit Restoration Plan (Restoration Plan) formally known as
the Northwest FCS Defined Benefit Restoration Plan. Each eligible employee whose retirement
benefit under the Pension Plan is limited by Internal Revenue Code Sections 401(a) (17), 415, or
any Code provision or government regulations subsequently issued, will receive a benefit if these
programs are continued. Under the present plan, the monthly benefit is equal to the difference
between the participant’s actual monthly retirement benefit payment under the Pension Plan and
the monthly retirement benefit payment that would be payable to the participant under the
Pension Plan if the limitations of Internal Revenue Code Sections 401(a) (17), 415, or any code
provision or government regulations subsequently issued, did not apply.
Income Taxes
As previously described, Northwest Farm Credit Services, ACA conducts its business activities
through two wholly owned subsidiaries. Long-term mortgage lending activities are operated
through a wholly owned FLCA subsidiary which is exempt from federal and state income tax.
Short- and intermediate-term lending activities are operated through a wholly owned PCA
subsidiary. Operating expenses are allocated to each subsidiary based on estimated relative
service. Transactions between the subsidiaries and the parent company have been eliminated upon
consolidation. The ACA, along with the PCA subsidiary, is subject to income taxes.
Northwest FCS accounts for income taxes under the liability method. Accordingly, deferred taxes
are recognized for estimated taxes ultimately payable or recoverable based on federal, state, or
local laws.
Northwest Farm Credit Services, ACA and its subsidiary, Northwest Farm Credit Services, PCA are
subject to federal income tax and pay state income taxes in Montana and Oregon. A declaratory
ruling was received from the Idaho State Tax Commission in late 2013 which determined that both
entities will be subject to state income tax in Idaho on a prospective basis. Both entities currently
operate as cooperatives that qualify for tax treatment under Subchapter T of the Internal Revenue
Code. Accordingly, under specified conditions, they can exclude from taxable income amounts
distributed as qualified patronage refunds in the form of cash, stock, or allocated surplus.
Provisions for income taxes are made only on those earnings that will not be distributed as
qualified patronage refunds.
Deferred taxes are recorded on the tax effect of all temporary differences based on the
assumption that such temporary differences are retained by Northwest FCS and will therefore
impact future tax payments. A valuation allowance is provided against deferred tax assets to the
extent that it is more likely than not (over 50 percent probability), based on management’s
estimate, that they will not be realized. The consideration of valuation allowances involves various
estimates and assumptions as to future taxable earnings, including the effects of Northwest FCS’
expected patronage program, which reduces taxable earnings.
Deferred income taxes have not been provided by Northwest FCS on stock patronage distributions
received from the Bank prior to January 1, 1993, the adoption date of the FASB guidance on
income taxes. Management’s intent is to permanently invest these and other undistributed
earnings in the Bank, or if converted to cash, to pass through any distribution related to pre-1993
earnings to Northwest FCS’ stockholders through qualified patronage allocations. Northwest FCS
has not provided deferred income taxes on amounts allocated to Northwest FCS which relate to
the Bank’s post-1992 earnings to the extent that such earnings will be passed through to
Northwest FCS’ stockholders through qualified patronage allocations. Additionally, deferred income
taxes have not been provided on the Bank’s post-1992 unallocated earnings. The Bank currently
has no plans to distribute unallocated Bank earnings and does not contemplate circumstances that,
if distributions were made, would result in taxes being paid by Northwest FCS.
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Patronage Distributions from CoBank, ACB
Northwest FCS records patronage distributions from CoBank on an accrual basis. Under the current
CoBank capital plan, the bank distributes patronage from Northwest FCS’ direct lending business in
cash. For patronage applicable to participations sold to CoBank, patronage is distributed in 75
percent cash and 25 percent Class A stock.
Derivative Instruments and Hedging Activity
In the normal course of business, Northwest FCS enters into derivative financial instruments
(derivatives) that are principally used to manage interest rate and foreign currency exchange rate
risk on assets. Derivatives are recorded on the Consolidated Balance Sheet as Other assets and
Other liabilities at fair value.
Changes in the fair value of derivatives are recorded in current period earnings or accumulated
other comprehensive income (loss), depending on the use of the derivative and whether it qualifies
for hedge accounting. For fair-value hedge transactions that hedge changes in the fair value of
assets, liabilities, or firm commitments, changes in the fair value of the derivative are recorded in
earnings and will generally be offset by changes in the hedged item’s fair value. For cash-flow
hedge transactions, in which Northwest FCS is hedging the variability of future cash flows related
to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the
derivative will generally be deferred and reported in accumulated other comprehensive income
(loss). The gains and losses on the derivative that are deferred and reported in accumulated other
comprehensive income (loss) will be reclassified as earnings in the periods in which earnings are
impacted by the variability of the cash flows of the hedged item. The ineffective portion of all
hedges is recorded in current period earnings. For derivatives not designated as a hedging
instrument, the related change in fair value is recorded in current period earnings.
Northwest FCS formally documents all relationships between hedging instruments and hedged
items, as well as its risk management objectives and strategies for undertaking hedge transactions.
This process includes linking all derivatives that are designated as fair-value or cash-flow hedges to
(1) specific assets or liabilities on the Consolidated Balance Sheet, or (2) firm commitments or
forecasted transactions. Northwest FCS also formally assesses (at the hedge’s inception and on an
ongoing basis) whether the derivatives that are used in hedging transactions have been highly
effective in offsetting changes in the fair value or cash flows of hedged items and whether those
derivatives may be expected to remain highly effective in future periods. Due to the structure of
Northwest FCS’ current derivative transactions, management has no reason to believe that hedge
accounting qualifications will not be met and believes the transactions will continue to be recorded
in the manner described in Note 17 of these Consolidated Financial Statements.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) is a measure of all changes in the equity of Northwest FCS as
a result of recognized transactions and other economic events of the period other than capital
transactions with the stockholders. Other comprehensive income (loss) refers to revenue,
expenses, gains and losses that under GAAP are recorded as an element of members’ equity and
comprehensive income but are excluded from net income. Other comprehensive loss is comprised
of adjustments related to Northwest FCS’ Pension Plan and Restoration Plan as well as adjustments
related to its derivative contracts used to manage interest rate and exchange rate risk on assets.
Fair Value Measurements
Accounting guidance defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. It describes three levels of inputs that may be
used to measure fair value:
Level 1 – Quoted prices in active markets for identical assets or liabilities that the reporting entity
has the ability to access at the measurement date. Level 1 assets include assets held in trust
funds, which relate to amounts in a deferred compensation and a supplemental retirement plan.
The trust funds include investments that are actively traded and have quoted net asset values that
are observable in the marketplace. Pension plan assets that are invested in equity securities,
including mutual funds, and fixed-income securities that are actively traded are also included in
Level 1.
Level 2 – Observable inputs other than quoted prices included within Level 1 that are observable
for the asset or liability either directly or indirectly. Level 2 inputs include the following: (a) quoted
prices for similar assets or liabilities in active markets; (b) quoted prices for identical or similar
assets or liabilities in markets that are not active so that they are traded less frequently than
exchange-traded instruments, the prices are not current or principal market information is not
released publicly; (c) inputs other than quoted prices that are observable such as interest rates
and yield curves, prepayment speeds, credit risks and default rates and (d) inputs derived
principally from or corroborated by observable market data by correlation or other means. Pension
plan assets that are derived from observable inputs, including corporate bonds and mortgage-
backed securities are reported in Level 2. This category includes derivative contracts.
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Level 3 – Unobservable inputs are those that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities. These unobservable inputs reflect the
reporting entity’s own assumptions about factors that market participants would use in pricing the
asset or liability. Level 3 assets and liabilities include financial instruments whose value is
determined using pricing models, discounted cash flow methodologies, or similar techniques, as
well as instruments for which the determination of fair value requires significant management
judgment or estimation. This category generally includes certain private equity investments,
retained residual interests in securitizations, asset-backed securities, highly structured or long-term
derivative contracts as well as loans, investments in system entities, and other property owned.
Pension plan assets that are supported by little or no market data in determining the fair value are
included in Level 3.
The fair value disclosures are presented in Note 11, Note 14, and Note 16.
Off-Balance Sheet Credit Exposures
Commitments to extend credit are agreements to lend to customers, generally having fixed
expiration dates or other termination clauses that may require payment of a fee. Commercial
letters of credit are conditional commitments issued to guarantee the performance of a customer
to a third party. These letters of credit are issued to facilitate commerce and typically result in the
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.
Northwest FCS has specialized staff and has tailored financial products to effectively serve these
diversified markets. A summary of loans follows:
Northwest FCS may purchase or sell loan participation interests with other parties in order to
diversify risk, manage loan volume and comply with FCA regulations. The following table presents
information regarding participations purchased and sold as of December 31, 2013. Participations
purchased volume in the table excludes similar entity syndications and purchases of other interests
in loans:
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Northwest FCS' concentration of credit risk in various agricultural commodities and industries is
shown in the following table, which includes accrued interest:
While the amounts represent Northwest FCS' maximum potential credit risk as it relates to
recorded loan principal, a substantial portion of Northwest FCS' lending activities is collateralized
and exposure to credit loss associated with lending activities is reduced accordingly. An estimate of
the current loss exposure is considered in the determination of the allowance for loan losses in the
consolidated financial statements.
The amount of collateral obtained, if deemed necessary upon extension of credit, is based on
management’s credit evaluation of the borrower. Collateral held varies but typically includes
farmland and income-producing property, such as crops and livestock, machinery and equipment
as well as inventories and receivables. Long-term real estate loans are secured by first liens on the
underlying real property. Federal regulations state that long-term real estate loans are not to
exceed 85 percent (97 percent if guaranteed by a government agency) of the property’s appraised
value. However, a decline in a property’s market value subsequent to loan origination or advances,
or other actions necessary to protect the financial interest of Northwest FCS in the collateral, may
result in loan-to-value ratios in excess of the regulatory maximum.
One credit quality indicator utilized by Northwest FCS is the FCA Uniform Loan Classification
System that categorizes loans into five categories. The categories are defined as follows: Acceptable – assets are expected to be fully collectible and represent the highest quality;
Other assets especially mentioned (OAEM) – assets are currently collectible but exhibit some
potential weakness;
Substandard – assets exhibit some serious weakness in repayment capacity, equity, and/or
collateral pledged on the loan;
Doubtful – assets exhibit similar weaknesses to substandard assets; however, doubtful assets
have additional weaknesses in existing factors, conditions and values that make collection in
full highly questionable; and,
Loss – assets are considered uncollectible.
The following table shows loans and related accrued interest classified under the FCA Uniform
Loan Classification System as a percentage of total loans and related accrued interest receivable by
loan type as of December 31:
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Impaired loans are loans for which it is probable that all principal and interest will not be collected
according to the contractual terms. The following table presents information relating to impaired
loans, including accrued interest, where applicable:
Commitments to lend additional funds to debtors whose loans were classified as impaired at
December 31, 2013, 2012, and 2011 totaled $6,648, $8,447, and $15,023, respectively.
Nonperforming assets consist of impaired loans and other property owned. The following table
presents these nonperforming assets in a more detailed manner than the previous table. The
nonperforming assets, including related accrued interest where applicable, are as follows:
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Additional impaired loan information, including related accrued interest where applicable, as of
December 31, 2013, 2012, and 2011 is as follows:
29
Interest income is recognized and cash payments are applied on impaired nonaccrual loans as
described in Note 2. The following table presents interest income recognized on impaired loans:
Interest income on nonaccrual and accruing restructured loans that would have been recognized
under the original terms of the loans were as follows:
The variance between the interest income recognized in the current period and interest income
that would have been recognized under the original terms for the year ended December 31, 2013,
is the result of recapture of interest income contractually due in prior periods.
The following tables provide an aging analysis of past due loans and accrued interest:
Note: The recorded investment in the receivable is the face amount increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges, or acquisition costs and may also reflect a previous direct write-down of the investment.
A restructuring of a debt constitutes a troubled debt restructuring if the creditor, for economic or
legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it
would not otherwise consider a market transaction. Concessions vary, are borrower specific, and
may include any of the following: interest rate reductions, term extensions or adjustments, or loan
reamortization. In rare cases, principal obligations may be reduced.
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The following table presents additional information regarding troubled debt restructurings that
occurred during the years ended December 31, 2013, 2012, and 2011:
Note: Pre-modification represents the recorded investment just prior to restructuring and post-modification represents the recorded investment immediately following the restructuring. The recorded investment is the face amount of the receivable increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges, or acquisition costs and may also reflect a previous direct write-down of the investment.
During 2013, troubled debt restructurings that occurred within the previous 12 months and for
which there was a subsequent payment default during the period totaled $4,033, of which $3,482
was classified as real estate mortgage and $551 was classified as rural home loans. During 2012,
troubled debt restructurings that occurred within the previous 12 months and for which there was
a subsequent payment default during the period totaled $105, substantially all were classified as
real estate mortgages. During 2011, troubled debt restructurings that occurred within the previous
12 months and for which there was a subsequent payment default during the period totaled
$3,283, all classified as production and intermediate term.
At December 31, 2013, additional commitments to lend to borrowers whose loans have been
modified in troubled debt restructurings were $4,188.
The following table provides information on outstanding loans restructured in troubled debt
restructurings (TDRs) as of December 31 2013, 2012, and 2011. These loans are included as
impaired loans in the impaired loans table.
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Summaries of the changes in the allowance for loan losses and the ending balance of loans and accrued interest outstanding as of December 31, 2013, 2012, and 2011 are as follows:
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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. 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. There was no activity related to Farmer Mac in 2013 or 2012. Fees for such
commitments totaled $864 for the year ended December 31, 2011, which includes the termination
fee. As of December 31, 2013, 2012, and 2011 there were no loans remaining under this
agreement.
During 2007, 2004, and 2002, Northwest FCS entered into credit default swaps with Mt. Spokane
2007-A LLC (2007 LLC), Mt. Spokane 2004-A LLC (2004 LLC), and Mt. Spokane Trust 2002-A
(Trust), respectively, for credit enhancement purposes. Each of the agreements will remain in
place over the life of the loans under the swap agreement, and fees are paid accordingly based on
the volume of the loans under the agreements. At the establishment of each agreement,
Northwest FCS capitalized costs of $1,601, $2,318 and $2,618, respectively, all of which have been
fully amortized as of December 31, 2013. The following discussion provides the key provisions of
each of the agreements.
2007 LLC
Pursuant to the credit default swap, following the occurrence of a known loss, the 2007 LLC will be
required to pay an amount to Northwest FCS equal to the principal amount of the defaulted loan
plus covered interest and costs less any recoveries. No payment is due to Northwest FCS until
Northwest FCS’ Retained First Loss Notional Amount is reduced to zero. In addition to loss events,
proportionate reductions in the Retained First Loss Notional Amount will occur due to reductions of
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the Aggregate Notional Amount of the Reference obligations associated with non-loss events such
as repayment of loan principal. As of December 31, 2013, the balance of the Retained First Loss
Notional Amount was $2,309. The maximum amount of losses the 2007 LLC will be required to pay
under the credit default swap was $15,004 and $233 of losses have been incurred by Northwest
FCS.
2004 LLC
Pursuant to the credit default swap, following the occurrence of a known loss, the 2004 LLC will be
required to pay an amount to Northwest FCS equal to the principal amount of the defaulted loan
plus covered interest and costs less any recoveries. As of December 31, 2013, the maximum
amount of losses the 2004 LLC will be required to pay under the credit default swap was $10,328
and $259 of losses have been incurred by the 2004 LLC.
Trust
During 2012, Northwest FCS exercised its right to redeem the Trust transaction as the outstanding
balance was below 10 percent of the original balance as of June 30, 2012. The impacts of
unwinding this transaction to Northwest FCS’ financial position, capital ratios and credit quality
were minimal.
The following tables provide information related to loan balances, fees and amortization pertaining
to the aforementioned credit default swap agreements:
Trust and 2004 LLC are variable interest entities created by Bank of America to acquire eligible
securities, which will be used as collateral to secure the Failure to Pay Credit Event payment of the
Trust or 2004 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. Included are obligations of the Federal National
Mortgage Association, Federal Home Loan Mortgage Corporation, Federal Home Loan Bank or
obligations of any agency or instrumentality of the United States of America the obligations of
which are backed by the full faith and credit of the United States of America.
2007 LLC is also a variable interest entity created by Lehman Brothers to acquire eligible securities,
which will be used as collateral to secure the Failure to Pay Credit Event payment of the 2007 LLC
under a credit default swap with Northwest FCS. The bankruptcy of Lehman Brothers in 2008 did
not have an economic impact on the 2007 LLC. The securities are limited to direct obligations of,
and obligations fully guaranteed as to timely payment of principal and interest by, the United
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, 2013, Northwest FCS’ investment in CoBank is in the form of Class A stock with a
par value of $100 per share. Northwest FCS is required to own stock in CoBank to capitalize its
direct loan balance and participation loans sold to CoBank. The current requirement for capitalizing
its direct loan from CoBank is 4 percent of Northwest FCS’ prior year average direct loan balance.
The 2013 requirement for capitalizing its patronage-based participation loans sold to CoBank is 8
percent of Northwest FCS’ prior ten-year average balance of such participations sold to CoBank.
Under the current CoBank capital plan applicable to such participations sold, patronage from
CoBank related to these participations sold is paid 75 percent cash and 25 percent Class A stock.
The capital plan is evaluated annually by CoBank’s board and management and is subject to
change. The fair value of Northwest FCS’ investment in CoBank is considered to approximate its
cost.
The lending bank may require the holders of its equities to subscribe for such additional capital as
may be needed by the Bank to meet its capital requirements or its joint and several liability under
34
the Act and regulations. In making such a capital call, the Bank shall take into account the financial
condition of each such holder and such other considerations, as it deems appropriate.
NOTE 5 > Premises and Equipment Premises and equipment consist of the following:
Estimated useful lives are as follows: buildings are 30 years, improvements and leaseholds are the
lesser of remaining lease term or 10 years, and furniture and equipment are 1 to 7 years. Land is
not depreciated. During 2013, Northwest FCS sold the remaining owned building and land for a
gain of $542.
Northwest FCS is obligated under various operating leases for certain office space and equipment.
Rental expense under these operating leases was $6,687, $6,403, and $6,352 for the years ended
December 31, 2013, 2012, and 2011, respectively. At December 31, 2013, future minimum lease
payments for leases are as follows:
The capital lease payments in the above table include $734 of interest; the total present value of
minimum capital lease payments at December 31, 2013 is $1,608.
NOTE 6 > Other Property Owned Net losses on other property owned consist of the following:
The Farm Credit Act requires that mineral rights acquired after 1985 through foreclosure be sold to
the buyer of the surface rights in the land. Northwest FCS retains certain mineral interests in land
acquired through foreclosure and sale proceedings prior to this requirement and in accordance
with the Farm Credit Act, for which it receives income from leases and royalties. These intangible
assets have no recorded value on the Consolidated Balance Sheet. Income earned on these
mineral rights for the years ended December 31, 2013, 2012, and 2011 were $7,765, $6,420, and
$5,175, respectively, which are included in Other income on the Consolidated Statement of
Income.
NOTE 7 > Note Payable to CoBank, ACB Northwest FCS’ indebtedness to CoBank represents borrowings by Northwest FCS to fund its loan
portfolio. This indebtedness is collateralized by a pledge of substantially all of Northwest FCS’
assets and is governed by a General Financing Agreement (GFA), which provides Northwest FCS
an open-ended revolving line of credit. The GFA and other term structures available to Northwest
FCS from CoBank are subject to periodic renewals in the normal course of business. Each debt
obligation has its own term and rate structure. Northwest FCS was in compliance with the terms
and conditions of the GFA as of December 31, 2013. The weighted average interest rate for all
debt was 1.59, 1.66, and 1.94 percent at December 31, 2013, 2012, and 2011, respectively. The
GFA will expire on May 31, 2018 and management expects renewal of the GFA at that time.
Through the direct note to the bank, Northwest FCS is liable for the following:
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Fixed rate debt typically has original maturities ranging from 1 to 30 years. Floating rate notes
generally have maturities ranging from 1 month to 9 years. Discount notes have maturities from
one day to 365 days. The revolving line of credit is renewed annually and is priced at the overnight
funds rate.
The maturities of debt within the direct note to the Bank as of December 31, 2013 are shown
below:
At December 31, 2013, callable debt was $783,000, with a range of call dates between January
2014 and March 2018.
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, 2013, Northwest FCS’
note payable is within the specified limitations.
Northwest FCS has a secondary source of liquidity and funding through an uncommitted Federal
Funds line of credit with Wells Fargo. The amount available through this line is $75,000 and is
intended to provide liquidity for disaster recovery or other emergency situations. At December 31,
2013, no balance was outstanding on this line of credit. Additionally, until December 2012,
Northwest FCS had a letter of credit facility with Bank of America to support letters of credit issued
on Industrial Revenue Bonds. This relationship was discontinued in 2012.
NOTE 8 > Members’ Equity A description of Northwest FCS' capitalization requirements, protection mechanisms, regulatory
capitalization requirements and restrictions, and equities are provided below.
Capital Stock and Participation Certificates
In accordance with the Farm Credit Act and Northwest FCS’ capitalization bylaws, each borrower is
required to invest in Northwest FCS as a condition of borrowing. Borrowers acquire ownership of
capital stock or participation certificates at the time the loan is made but usually do not make a
cash investment. Effective November 19, 2012, the aggregate par value of the stock is treated as a
non-interest bearing receivable from the customer. Prior to November 19, 2012, the aggregate par
value of the stock was added to the principal amount of the related loan obligation. At the time
this change occurred, approximately $13,169 was transferred from loans to Other assets on the
Consolidated Balance Sheet. Northwest FCS retains a first lien on common stock or participation
certificates owned by its borrowers.
Pursuant to provisions of the Farm Credit Act, the System’s minimum initial borrower investment
requirement is one thousand dollars or 2 percent of the related loan balance on a per customer
basis, whichever is less. The bylaws of Northwest FCS provide its Board of Directors with the
authority to modify the capitalization requirements for new loans subject to a maximum of 4
percent of the related loan balance.
Retirement of equities noted above will be at the lower of par or book value, and repayment of a
loan does not automatically result in retirement of the corresponding stock or participation
certificates. Northwest FCS' Board of Directors considers the current and future status of
permanent capital requirements before authorizing any retirement of at-risk equities. Pursuant to
FCA regulations, should Northwest FCS fail to satisfy its minimum permanent capital requirements,
retirements of at-risk equities subsequent to such noncompliance would be prohibited, except for
retirements in the event of default or loan restructuring.
Protected Borrower Stock
Protection of certain borrower stock (Class B participation certificates) is provided under the Farm
Credit Act, which requires Northwest FCS, when retiring protected borrower stock, to retire such
stock at par value or stated value regardless of its book value. Protected borrower stock includes
capital stock and participation certificates issued prior to October 6, 1988. As of December 31,
2013, Northwest FCS had no remaining protected borrower stock outstanding, as the last
remaining balance was retired during 2011.
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Regulatory Capitalization Requirements and Restrictions
The FCA's capital adequacy regulations require Northwest FCS to maintain permanent capital of 7
percent of average risk-adjusted assets and off-balance-sheet commitments. Failure to meet this
requirement can initiate certain mandatory and possibly additional discretionary actions by the FCA
that, if undertaken, could have a direct material effect on Northwest FCS’ financial statements.
Northwest FCS is prohibited from reducing permanent capital by retiring stock or making certain
other distributions to stockholders unless prescribed capital standards are met. The FCA
regulations also require additional minimum standards for capital be maintained. These standards
require all System institutions to achieve and 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, 2013, were 14.7 percent, 14.6 percent, and 14.6 percent,
respectively. Management is not aware of any reasons why Northwest FCS’ regulatory capital
requirements would not be met in 2014, nor is it currently prohibited from retiring stock or
distributing earnings or expected to be in 2014.
An existing regulation empowers FCA to direct a transfer of funds or equities by one or more
System institutions to another System institution under specified circumstances. This regulation
has not been utilized to date. Northwest FCS has not been called upon to initiate any such
transfers and is not aware of any proposed action under this regulation.
Description of Equities
Northwest FCS is authorized to issue an unlimited number of shares of Class A common stock and
up to 500 million units of Class A participation certificates (PCs) with a par value of 5 dollars per
share. Class B PCs with a par value of 5 dollars per share are no longer being issued, and all were
retired as of December 31, 2011.
Class A common stock is at-risk, has voting rights, and may be retired at the discretion of
Northwest FCS' Board of Directors and, if retired, shall be retired at its book value, not to exceed
its par value. At December 31, 2013, there were 2,500,555 shares outstanding with a total par
value of $12,503.
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, 2013, there were 93,501 units outstanding with a total par
value of $467.
Northwest FCS is authorized to issue 100 million shares of Class D Nonvoting stock to the Bank
with a par value of 5 dollars per share. Class D Nonvoting stock is not transferable and is required
to be issued for cash, with Northwest FCS having no authority to require additional capital
contributions. Retirement and earnings distributions are subject to statutory and regulatory
restrictions. At December 31, 2013 there were no Class D Nonvoting shares 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.
Patronage
Northwest FCS’ bylaws provide for the payment of patronage distributions. All patronage
distributions to eligible stockholders shall be on a proportionate patronage basis as may be
approved by Northwest FCS’ Board of Directors, consistent with the requirements of Subchapter T
of the Internal Revenue Code. For the years ending December 31, 2013, 2012, and 2011, the
Board approved cash patronage distributions of $58,134, $55,245, and $53,264, respectively.
Patronage distributions are recorded on an accrual basis, based on estimated amounts. The
difference between the estimated accrual and the actual patronage distribution is reflected in
retained earnings in the year paid. In December 2013, the Board of Directors of Northwest FCS
approved a resolution to distribute a portion of 2014 earnings in the form of patronage dividends
to its stockholders. The patronage dividend will be accrued in 2014 and declared and paid in 2015.
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All earnings not distributed as qualified patronage allocations or appropriated for some other
purpose are retained as unallocated retained earnings. At December 31, 2013, all accumulated
earnings are retained as unallocated retained earnings. In accordance with Internal Revenue
Service requirements, each stockholder is sent a nonqualified written notice of allocation.
Allocated, but not distributed patronage refunds, are included as unallocated retained earnings
account. Such allocations may provide a future basis for a distribution of capital. The Board
considers these unallocated retained earnings to be permanently invested in the Association. As
such, there is no current plan to revolve or redeem these amounts. No express or implied right to
have such capital retired or revolved at any time is granted.
Other Accumulated Comprehensive Loss
Northwest FCS reports accumulated other comprehensive loss as a component of members’ equity,
which is reported net of taxes as follows:
The following table presents activity in the accumulated other comprehensive income (loss), net of
tax by component:
38
The following table represents reclassifications out of accumulated other comprehensive income
(loss):
NOTE 9 > Patronage Distributions from Farm Credit Institutions Patronage income recognized from Farm Credit Institutions to Northwest FCS totaled $43,490,
$42,028, and $39,833 for the years ended December 31, 2013, 2012, and 2011, respectively. Of
this amount $38,939, $38,820, and $38,077 for the years ended December 31, 2013, 2012, and
2011, respectively, was from CoBank. Patronage distributed from CoBank was in cash and stock.
The amount declared in December 2013 was accrued and will be paid by CoBank in 2014.
NOTE 10 > Income Taxes The provision for income taxes follows:
The provision for income tax differs from the amount of income tax determined by applying the
applicable U.S. statutory federal income tax rate to pretax income as follows:
Deferred tax assets and liabilities are comprised of the following:
The calculation of deferred tax assets and liabilities involves various management estimates and
assumptions as to the future taxable earnings, including the amount of non-patronage income and
patronage income retained. The expected future tax rates are based upon enacted tax laws.
Northwest FCS recorded a valuation allowance of $24,524, $35,434, and $25,139 during 2013,
2012, and 2011, respectively. Northwest FCS will continue to evaluate the realizability of the
deferred tax assets and adjust the valuation allowance accordingly.
During 2012, Northwest FCS established a liability of $1,000 for an uncertain tax position related to
a state tax position. During 2013, it was determined through interactions with the state taxing
authority that the position was sustainable and as such the uncertain tax liability was reversed
39
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
As of December 31, 2013, there were no amounts of unrecognized tax positions that, if recognized
would impact the effective tax rate. Northwest FCS does not have any positions for which it is
reasonably possible that the total amounts of unrecognized tax positions will significantly increase
or decrease within the next 12 months.
Northwest FCS recognizes interest and penalties related to unrecognized tax positions as an
adjustment to income tax expense. As the previously unrecognized tax position was recognized
during 2013, no interest or penalties were recorded for the year ended December 31, 2013.
Tax years that remain open for federal and state income tax jurisdictions are generally 2010 and
forward.
NOTE 11 > Employee Benefit Plans Certain employees of Northwest FCS participate in a Pension Plan. The Department of Labor has
determined the plan to be a governmental plan; therefore, the plan is not subject to the provisions
of the Employee Retirement Income Security Act of 1974, as amended (ERISA). As the plan is not
subject to ERISA, the plan’s benefits are not insured by the Pension Benefit Guaranty Corporation.
Accordingly, the amount of accumulated benefits that participants would receive in the event of
the plan’s termination is contingent on the sufficiency of the plan’s net assets to provide benefits at
that time. While the plan is a governmental plan and is not subject to minimum funding
requirements, Northwest FCS contributes amounts necessary on an actuarial basis to provide the
plan with sufficient assets to meet the benefits to be paid to participants. The amounts ultimately
to be contributed and to be recognized as expense as well as the timing of those contributions and
expenses, are subject to many variables including performance of plan assets and interest rate
levels. These variables could result in actual contributions and expenses being greater than or less
than anticipated.
For a limited number of highly-compensated participants in the Pension Plan mentioned above,
Northwest FCS also has a Restoration Plan that provides retirement benefits above the Internal
Revenue Code compensation limit for eligible individuals.
The Pension Plan was closed to new participants beginning January 1, 1995 and is
noncontributory. Benefits are based on salary and years of service. The following tables set forth
the obligations and funded status of Northwest FCS’ Pension Plan and Restoration Plan.
The funding status and the amounts recognized in the Consolidated Balance Sheet for post-
retirement benefit plans follows:
40
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 are as follows:
The estimated net loss for the Pension Plan and Restoration Plan that will be amortized from
accumulated other comprehensive loss into net periodic benefit cost in 2014 is $970 and $36,
respectively. There are no remaining prior service costs in accumulated other comprehensive loss
as of December 31, 2013.
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 risks. A Board of Trustees (Trustees), called the
Farm Credit Foundations Trust Committee, comprised of certain members of senior management
of the participating employers, supervises the investment assets of the plans on behalf of the
employers. The Trustees adopt an asset allocation strategy for each plan that reflects return and
risk objectives, plan liabilities, and other factors.
During 2013, the Trustees employed a total return investment approach whereby a mix of equities,
fixed income and real estate investments were used to maximize the long-term return of plan assets
for a prudent level of risk. The investment portfolio was designed to contain a diversified blend of
equity and fixed income investments. Furthermore, equity investments were diversified across U.S.
and non-U.S. stocks as well as growth, value, small, mid and large capitalizations.
During the fourth quarter of 2013, the Trust Committee adopted new investment policies that will
guide plan investment strategies for 2014. The new policies incorporate a liability-based framework in
which assets are managed to the unique liabilities of each plan. The overall objectives of these
policies are intended to meet the benefit obligations for the plan beneficiaries and to earn a long-term
rate of return consistent with the related cash flow profile of the underlying benefit obligations.
41
The execution of these policies permits the plans to pursue a well-defined risk management strategy
that is designed to reduce investment risks as the funded status improves; this is achieved through a
dynamically driven allocation process that measures assets and liabilities daily. To implement these
policies, the plans have adopted a diversified set of portfolio management strategies to optimize the
risk reward profile of the plans. Plan assets are divided into two primary component portfolios:
A return-seeking portfolio that is invested in a diversified set of assets designed to deliver
performance in excess of the underlying liability growth rate coupled with diversification
controls regarding the level of risk. Equity exposures are expected to be the primary drivers
of excess returns, but also introduce the greatest level of volatility of returns. Accordingly, the
return-seeking portfolio will contain additional asset classes that are intended to diversify
equity risk as well as contribute to excess return.
A liability hedging portfolio that is primarily invested in intermediate-term and long-term
investment grade corporate bonds in actively managed strategies that are intended to hedge
interest rate risk. The portfolio will progressively increase in size as each plan’s funded ratio
improves. The use of selected portfolio strategies incorporating derivatives may be employed
to improve the liability hedging characteristics or reduce risk. Finally, there is a managed
liquidity portfolio that is composed of short-term assets intended to pay periodic plan benefits
and expenses.
The largest subset will contain U.S. equities including securities that are both actively and passively
managed to their benchmarks across a full spectrum of capitalization and styles. Non-U.S. equities will
contain securities in both passively and actively managed strategies. Currency futures and forward
contracts may be held for the sole purpose of hedging existing currency risk in the portfolio. Other
investments that will serve as equity diversifiers will include high yield bonds: fixed income portfolio of
securities below investment grade including up to 30 percent of the portfolio in non-U.S.
issuers, global real estate securities: portfolio of diversified real estate investment trust and other
liquid real estate related securities and hedge fund of funds. These portfolios combine income
generation and capital appreciation opportunities from developed markets globally. Other investment
strategies may be employed to gain certain market exposures, reduce portfolio risk and to further
diversify portfolio assets.
During 2013, the asset allocation policy of the pension plan provided a target of 60 percent of assets
in equity securities, 35 percent in debt securities and 5 percent in real estate. For 2014, the asset
allocation policy of the pension plan provides a target of 70 percent of assets in return seeking
investments and 30 percent of assets in liability hedging investments. Specifically, return seeking
investments include: global equity securities, global real estate investment trust securities, hedge
funds, and high yield bonds; and liability hedging investments include high quality credit debt
securities. Tactical tilts will be employed based on the asset consultant’s medium term views and
capital market assumptions, but will remain within stated policy ranges. The plan assets were
reallocated to comply with the approved investment strategy during January 2014. Proceeding with
the new strategies, portfolios will be measured and monitored daily to ensure compliance with
investment policies.
The expected long-term rate of return assumption is determined by the Farm Credit Foundations
Plan Sponsor Committee (Plan Sponsor Committee) with input from the Trust Committee. The Plan
Sponsor Committee is comprised of certain members of senior management and boards of
directors of the participating employers. Historical return information is utilized to establish a best-
estimate range for each asset class in which the plan is invested. The most appropriate rate is
selected from the best-estimate range, taking into consideration the duration of plan benefit
liabilities and plan sponsor investment policies.
The fair values of the Pension Plan assets at December 31, 2013 by asset category are as follows:
42
Pension Plan assets are diversified into various investment types as shown in the preceding table.
An investment consultant is utilized to ensure the diversification of assets. The assets are spread
among numerous fund managers. Diversification is also obtained by selecting fund managers
whose funds are not concentrated in individual stocks and, for the case of international funds,
individual countries.
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active
markets would be classified as Level 1. Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability through corroboration with observable market data would be
classified as Level 2. In addition, assets measured at Net Asset Value (NAV) per share and may be
redeemed at NAV per share at the measurement date are classified as Level 2.
Unobservable inputs (e.g. a company’s own assumptions and data) and assets measured at NAV
per share which may not be redeemed at NAV per share at the measurement date would be
classified as Level 3. All assets are evaluated at the fund level.
There were no significant transfers in or out of Levels 1, 2, or 3 during the year.
The following table presents the expected future payments, which reflect expected future service,
as appropriate, from the Pension Plan and Restoration Plan.
Northwest FCS does not expect to make contributions to its Restoration Plan or the Pension Plan in
2014.
Employees not eligible to participate in the Pension Plan participate in the Defined Contribution
Plan, which is in accordance with Section 401 of the Internal Revenue Code. The Defined
Contribution Plan requires the employer to contribute 3 percent of eligible employee compensation
for eligible employees. For eligible employees hired prior to January 1, 2007, up to an additional 5
percent of compensation in excess of the employee social security wage base is available. Defined
Contribution Plan expense recorded by Northwest FCS was $1,682, $1,546, and $1,486 in 2013,
2012, and 2011, respectively.
All Northwest FCS employees may elect to defer a portion of their salaries in accordance with IRS
rules. For employees participating in the Pension Plan, Northwest FCS matches employee
contributions up to a maximum of 100 percent of the employees’ first 2 percent of eligible earnings
and 50 percent on the next 4 percent of eligible earnings. For employees participating in the
Defined Contribution Plan, Northwest FCS matches employee contributions up to a maximum of
100 percent on the employees’ first 6 percent of eligible earnings. Employer matching contributions
were $3,140, $2,297, and $2,182 for the years ended December 31, 2013, 2012, and 2011,
respectively.
The senior officer compensation package, as administered by the Board Compensation Committee,
includes a long-term incentive and retention program designed to retain senior management and
incent them for achieving certain specified personal and corporate goals. During the year ended
December 31, 2012, the Board approved a new long-term incentive plan (LTIP) for senior
management which began in 2012. The LTIP was only available to senior management and
included a single year plan and a multi-year plan beginning in 2012 for 2012-2013. In 2013, the
LTIP included a plan year which covered 2013-2014 and 2013-2015.
NOTE 12 > Related Party Transactions In the ordinary course of business, Northwest FCS enters into loan transactions with directors,
their immediate families, their affiliated organizations and affiliated organizations of senior officers.
Such loans are made on the same terms, including interest rates, amortization schedules and
collateral requirements, as those prevailing at the time for comparable transactions with unrelated
borrowers. Senior officers and their immediate families are precluded from obtaining loans from
Northwest FCS.
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Loan information to related parties for the years ended December 31 is shown below:
The repayments and other above reflects changes in related parties for the respective periods.
In the opinion of management, none of these loans outstanding at December 31, 2013 involved
more than a normal risk of collectability.
In the ordinary course of business, Northwest FCS enters into certain other transactions with
directors and their affiliated entities. These transactions for products and services are available to
all customers and are made on the same terms prevailing at the time for comparable transactions
with unrelated customers.
Northwest FCS also recognized $38,939, $38,820, and $38,077 of patronage distributions from
CoBank for the years ended December 31, 2013, 2012, and 2011, respectively. As of December
31, 2013, Northwest FCS’ investment in CoBank was $319,483, which is included in Assets on the
Consolidated Balance Sheet.
In the normal course of business Northwest FCS purchases loan participations from CoBank and
also sells loan participations to CoBank. At December 31, 2013, Northwest FCS had sold
participation interests to CoBank totaling $1,221,553 and had purchased loan participation
interests from CoBank totaling $719,711.
During 2010, Northwest FCS provided a limited recourse collection guaranty to CoBank covering
four participated loans. The remaining balances on the loans were $5,135 and $5,743 as of
December 31, 2012 and 2011 respectively. There were no remaining balances on these loans at
December 31, 2013. The unfunded commitments balance as of December 31, 2011 was $757.
There were no unfunded commitments as of December 31, 2013 or 2012. Pursuant to the terms of
the transaction, Northwest FCS guaranteed collection of 20 percent of the outstanding balance of
the loans over their respective remaining terms.
The investment in FPI was $1,493 as of December 31, 2013, which was included in Other assets
on the Consolidated Balance Sheet. Expenses recorded related to FPI for the years ended
December 31, 2013, 2012, and 2011 were $13,965, $11,646, and $10,211, respectively, which are
included within Other operating expenses on the Consolidated Statement of Income.
As of December 31, 2013, Northwest FCS’ investment in AgDirect was $18,819, which was
included in Other assets on the Consolidated Balance Sheet.
As of December 31, 2013, Northwest FCS had a 25.75 percent participation interest in ProPartners
loans originated after September 1, 2012, resulting in $235,632 included in Loans on the
Consolidated Balance Sheet.
As of December 31, 2013, Northwest FCS had equity ownerships in the following Unincorporated
Business Entities, which were all formed for the purpose of acquiring and managing unusual or
complex collateral associated with loans.
NOTE 13 > Regulatory Enforcement Matters No FCA regulatory enforcement actions currently exist with respect to Northwest FCS.
NOTE 14 > Fair Value 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 for additional information.
44
Assets and liabilities measured at fair value on a recurring basis at December 31, 2013, 2012, and
2011, for each of the fair value hierarchy values are summarized in the following tables:
The table below represents reconciliations of all Level 3 liabilities measured at fair value on a
recurring basis for the years ended December 31, 2013, 2012, and 2011.
There were no significant transfers between Level 1 and Level 2 during the year.
Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2013, 2012,
and 2011 for each of the fair value hierarchy values are summarized in the following table:
45
Valuation Techniques
As more fully discussed in Note 2 accounting guidance establishes a fair value hierarchy, which
requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The following 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 for which real estate
is the collateral. The fair value measurement process uses appraisals and other market-based
information, but in many cases it also requires significant input based on management’s knowledge
of and judgment about current market conditions, specific issues relating to the collateral and
other matters. As a result, these fair value measurements fall within Level 3 of the hierarchy.
When the value of the real estate, less estimated costs to sell, is less than the principal balance of
the loan, a specific reserve is established.
Other Property Owned
The process for measuring the fair value of other property owned involves the use of appraisals or
other market-based information. Costs to sell represent transaction costs and are not included as a
component of the asset’s fair value. As a result, these fair value measurements fall within Level 3
of the hierarchy.
NOTE 15 > Commitments and Contingencies Northwest FCS has various commitments outstanding and contingent liabilities.
Northwest FCS may participate in financial instruments with off-balance-sheet risk to satisfy the
financing needs of its customers and to manage their exposure to interest-rate risk. These financial
instruments include commitments to extend credit and/or commercial letters of credit. The
instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized
in the financial statements. Commitments to extend credit are agreements to lend to a customer
as long as there is not a violation of any condition established in the contract. Commercial letters
of credit are agreements to pay a beneficiary under conditions specified in the letter of credit.
Commitments and letters of credit generally have fixed expiration dates or other termination
clauses and may require payment of a fee. At December 31, 2013, $3,730,013 of commitments to
extend credit and $23,171 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.
46
Northwest FCS also participates in standby letters of credit to satisfy the financing needs of its
borrowers. These letters of credit are irrevocable agreements to guarantee payments of specified
financial obligations. Standby letters of credit are recorded at fair value on the Consolidated
Balance Sheet. At December 31, 2013, $80,733 of standby letters of credit were outstanding. The
standby letters of credit typically have expiration dates of one year or less.
Northwest FCS maintains a contingency reserve for unfunded commitments, which reflects our
best estimate of losses inherent in lending commitments made to customers but not yet disbursed
upon. The reserve totaled $15,000 at December 31, 2013 and $12,000 at December 31, 2012 and
2011.
During 2012 and 2011, Northwest FCS recorded a contingent liability of $1,000 and $2,000,
respectively, related to a revenue tax. During 2013, Northwest FCS completed managed audit
proceedings with the taxing authority and obtained a resolution of amounts potentially owed for
periods open within the statute of limitations. The resolution resulted in Northwest FCS making a
net payment of $1,362 to the taxing authority. The reversal of the remaining previously recorded
liability of $1,638 is included as a reduction to Other expense in the Consolidated Statement of
Income.
In addition, actions are pending against Northwest FCS in which claims for monetary damages are
asserted. Based on current information, management and legal counsel are of the opinion that the
ultimate liability, if any resulting there from, would not be material in relation to the financial
position and results of operation of Northwest FCS.
NOTE 16 > Disclosures about Fair Value of Financial Instruments Quoted market prices are generally not available for certain System financial instruments, as
described below. Accordingly, fair values are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various financial instruments, and
other factors. These estimates involve uncertainties and matters of judgment, and therefore
cannot be determined with precision. Changes in assumptions could significantly affect the
estimates.
The next table presents the carrying amounts and estimated fair values of Northwest FCS’ financial
instruments at December 31, 2013, 2012, and 2011:
A description of the methods and assumptions used to estimate the fair value of each class of
Northwest FCS' financial instruments for which it is practicable to estimate that value follows:
Loans
Fair value is estimated by discounting the expected future cash flows using Northwest FCS’ current
interest rates at which similar loans would be made or repriced to borrowers with similar credit
risk. As the discount rates are based on Northwest FCS’ loan origination rates as well as
management estimates of credit risk, management has no basis to determine whether the
estimated fair values presented would be indicative of the assumptions and adjustments that a
purchaser of the loans would seek in an actual sale, which could be less.
For purposes of determining fair value of accruing loans, the loan portfolio is segregated into pools
of loans with homogeneous characteristics. Expected future cash flows and interest rates reflecting
appropriate credit risk are separately determined for each individual pool.
For nonaccrual loans, it is assumed that collection will result only from the disposition of the
underlying collateral. Fair value of these loans is estimated to equal the aggregate net realizable
value of the underlying collateral. When the net realizable value of collateral exceeds the legal
obligation for a particular loan, the legal obligation was used for evaluating fair values of the
47
respective loans. The carrying value of accrued interest receivable was assumed to approximate its
fair value. Loans shown in the table above are valued within the fair value Level 3 hierarchy.
Allowance for Loan Losses
As discussed in Note 2, the allowance for loan losses represents an estimate of the credit risk in
Northwest FCS' loan portfolio. Because the discount rate used to adjust the carrying value of each
loan pool to its fair value reflects the credit risk in the loan portfolio, the allowance for loan losses
is not considered necessary in determining the fair value of Northwest FCS' financial instruments.
The allowance for loan losses shown in the table above is valued within the fair value Level 3
hierarchy.
Investment in System Entities
Northwest FCS has investments in other System entities including but not limited to the Bank,
AgDirect, and FPI as discussed in Note 12. The cost of these investments is considered to
approximate fair value. The investment in System entities shown above is valued within the fair
value Level 3 hierarchy.
Assets Held in Non-Qualified Benefit Trusts
These assets relate to deferred compensation and supplemental retirement plans. As discussed in
Note 14, the fair value of these assets is quoted net asset values. The assets held in non-qualified
benefit trusts shown in the table above is valued within the fair value Level 1 hierarchy.
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. The note
payable to CoBank shown in the table above is valued within the fair value Level 3 hierarchy.
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. The derivative assets and liabilities shown in
the table above is valued within the fair value Level 2 hierarchy.
Standby Letters of Credit
The fair value of standby letters of credit is based on fees currently charged for similar
agreements. The standby letters of credit shown in the table above is valued within the fair value
Level 3 hierarchy.
NOTE 17 > Derivative Instruments and Hedging Activities Northwest FCS maintains an overall risk management strategy that incorporates the use of
derivative financial instruments to minimize significant unplanned fluctuations in earnings that are
caused by interest rate volatility. Our goal is to manage interest rate sensitivity by modifying the
repricing or maturity characteristics of certain balance sheet assets and liabilities. Northwest FCS
also maintains a foreign exchange risk management strategy to reduce the impact of foreign
currency fluctuations on our foreign currency denominated loan assets. As a result of interest rate
and foreign exchange rate fluctuations, fixed rate assets and liabilities will appreciate or depreciate
in market value. The effect of this variability in earnings is expected to be substantially offset by
gains and losses on the derivative instruments that are linked to these assets and liabilities.
Northwest FCS considers the strategic use of derivatives to be a prudent method of managing
interest rate and foreign exchange risk, as it prevents earnings from being exposed to undue risk
posed by changes in interest rates or foreign exchange rates.
By using derivative instruments, Northwest FCS exposes itself to credit risk and market risk.
Generally, when the fair value of a derivative contract is positive, this indicates that the
counterparty owes Northwest FCS, thus creating a performance risk for Northwest FCS. When the
fair value of the derivative contract is negative, Northwest FCS owes the counterparty and,
therefore assumes no performance risk. Northwest FCS’ derivative activities are monitored by the
ALCO as part of the Committee’s oversight of the asset/liability and treasury functions. The
Committee is responsible for approving hedging strategies that are developed within parameters
established by Northwest FCS’ Board of Directors. The resulting hedging strategies are then
incorporated into Northwest FCS’ overall risk-management strategies.
48
Northwest FCS has purchased an interest rate cap from CoBank to hedge the potential impact of
rising interest rates on our floating-rate debt. If the strike rate of the purchased interest rate cap is
exceeded, Northwest FCS will receive cash flows on the derivative to hedge our floating-rate
funding exposure above such strike levels. The interest rate cap is accounted for as a cash-flow
hedge. The interest rate cap has a notional amount of $73,000, and was purchased at a trade-date
fair value of $1,500. As of December 31, 2013, the interest rate cap fair value was $323 and a
corresponding loss of $1,146 was recorded to accumulated other comprehensive loss. During
2013, $31 was reclassified from accumulated other comprehensive loss and recorded as a
reduction of net interest income. As of December 31, 2012, the interest rate cap fair value was
$129 and the corresponding loss of $1,371 was recorded to accumulated other comprehensive
loss. At December 31, 2011, the interest rate cap fair value was $477 and the corresponding loss
of $1,023 was recorded to accumulated other comprehensive loss.
Northwest FCS also uses foreign exchange forward positions to “lock in” a desired cash flow on
foreign currency denominated loans. The specific terms and amounts of the forwards are
determined based on the known cash flows on the loans. Each cash flow is hedged via a separate
foreign exchange forward sale as it arises. As of December 31, 2013, Northwest FCS recorded a
derivative asset of $137 for its executed foreign currency forward contracts, with the
corresponding changes in value recorded to accumulated other comprehensive loss adjusted in
accordance with accounting guidance on foreign currency translation. The fair value at December
31, 2012, was a derivative liability of $37 with the corresponding changes in value recorded to
accumulated other comprehensive loss adjusted in accordance with accounting guidance on
foreign currency translation. The fair value at December 31, 2011, was a derivative liability of $293
with the corresponding changes in value to accumulated other comprehensive loss adjusted in
accordance with accounting guidance on foreign currency translation
NOTE 18 > Quarterly Financial Information (Unaudited) Quarterly results of operations for the years ended December 31, 2013, 2012, and 2011 are as
follows:
Northwest FCS’ 2013 Quarterly Reports to Stockholders are available free of charge by contacting
Northwest Farm Credit Services, ACA, P.O. Box 2515, Spokane Washington 99220-2515 or
contacting by telephone at (509) 340-5300 or toll free (800) 743-2125 . Northwest FCS’ 2013
Quarterly Reports to Stockholders are also available free of charge at any office location or at
www.northwestfcs.com. The 2014 Quarterly Reports to Stockholders will be available on
approximately May 9, 2014, August 8, 2014, and November 7, 2014. The Northwest FCS 2014
Annual Report will be posted on www.northwestfcs.com approximately March 14, 2015.
NOTE 19 > Subsequent Events Northwest FCS has evaluated subsequent events through February 28, 2014, which is the date the
financial statements were issued or available to be issued and determined there are no other items
to disclose.
49
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
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 leases various facilities
across the territory it serves, which are described in this annual report.
Legal Proceedings Information regarding legal proceedings is incorporated herein by reference to Note 15 of the
Consolidated Financial Statements included in this annual report.
Description of Capital Structure Information regarding capital structure is incorporated herein by reference to Note 8 of the
Consolidated Financial Statements included in this annual report.
Description of Liabilities Information regarding liabilities is incorporated herein by reference to Notes 5, 7, 10, 11, 15 and
16 of the Consolidated Financial Statements included in this annual report.
Selected Financial Data “Five Year Summary of Selected Financial Data” included in this annual report is incorporated
herein by reference.
Management’s Discussion and Analysis Management’s Discussion and Analysis included in this annual report is incorporated herein by
reference.
Board of Directors
Corporate Governance
The Board of Directors of Northwest FCS is comprised of 14 director positions. Eleven directors are
elected by the voting membership. Each represents one of eleven geographic regions that
comprise Northwest FCS’ operating territory. Three directors are elected by the board. Two of
these board-elected directors are Outside Directors who cannot be customers, stockholders,
employees or agents of any Farm Credit institution. One of these outside directors is designated as
a “financial expert” as defined by FCA Regulation. This director brings independence and financial,
accounting and audit expertise to the board and chairs the board’s Audit Committee. The other
outside director position is used to bring independence, an outside perspective and other areas of
expertise to enhance board oversight capabilities. Currently, both outside directors qualify as
financial experts and one acts as an alternate to the designated “financial expert.” The third board-
elected director position is a stockholder and is intended to help assure representation of market
segments not currently represented by a stockholder-elected director position or to bring additional
desired skills or background to the board.
Northwest FCS’ board has a comprehensive director training and development program. This
training consists of an annual board self-assessment of its governance practices as well as a
comprehensive new director orientation program. This program is intended to develop an
understanding of the roles and responsibilities of a director and to familiarize newer board
members with key areas of financial performance, reporting and board oversight. This training
commitment involves an expectation of attendance by all directors at both Farm Credit System and
non-System meetings, seminars and conferences as well as completion of a comprehensive board
training and leadership program during their term of service. This balance of training assures not
only an understanding of the Farm Credit System, but also exposes board members to best
practices of other financial and lending institutions and allows them to benchmark Northwest FCS’
operations against those of other successful lending institutions.
The board is independent of management. The CEO and Internal Auditor report to the board and
no management or employees may serve as directors. The board generally has six regularly
scheduled meetings each year, plus interim conference calls as needed between meetings. One of
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those regularly scheduled meetings is conducted as a comprehensive three-day strategic planning
session. The board operates with a structure of five committees: Governance, Audit,
Compensation, Risk and Strategy. These committees are structured to provide focus and expertise
in key areas of board oversight and to enhance the overall efficiency of scheduled board meetings.
All policies, substantial contracts and other major initiatives are generally reviewed by one of these
committees, with any actions recommended to the full board for approval. Each committee
approves a charter 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 charters are reviewed and approved by the full board at least
annually. This committee structure is organized to reflect Northwest FCS’ key financial and
operational areas of risk and to enhance the overall effectiveness of the board’s oversight of these
areas. These committees generally meet as part of regularly scheduled board meetings and also
conduct conference calls as needed.
With the exception of the Governance and Compensation Committees, committee members are
identified by the board Chair in consultation with the Vice Chair and CEO. The Chair and Vice Chair
of each committee are elected by committee members. In the case of the Governance Committee,
committee members as well as the Chair and Vice Chair are set by policy as outlined below. In the
case of the Compensation Committee, the CEO does not participate in identifying its members or
its Chair and Vice Chair. Compensation Committee members and the Chair and Vice Chair of this
committee are identified by the board Chair in consultation with the Vice Chair and at least one
outside director. Following are full descriptions of the committees:
Governance Committee
This committee is made up of the Chair and Vice Chair of the board as well as the Chair of the
Compensation, Audit, Risk and Strategy Committees. The board Chair and Vice Chair act as the
Chair and Vice Chair of this committee. The Governance Committee has the authority to review,
prioritize and recommend agenda items for board meetings and is responsible for all board policies
not assigned to other committees. Committee duties also include serving as an ad hoc committee
on major System and organizational issues as well as System legislative and regulatory affairs. 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 outside director.
All members of the committee are expected to have practical knowledge of finance and
accounting, be able to read and have a working understanding of the financial statements, or
develop that understanding within a reasonable period of time after being appointed to the
committee. The director designated as the “financial expert” serves as the chair of this committee.
Outside director Christy Burmeister-Smith currently serves in this position. The board 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 has unrestricted access to representatives of the Internal Audit department,
independent public accountants and Finance Division. Internal Audit reports directly to this
committee.
This committee assists the board in fulfilling its oversight responsibility related to accounting
policies, internal controls, financial reporting practices and regulatory requirements. This
committee has a charter detailing its purpose and key objectives, authority, composition, meeting
requirements and responsibilities. The charter, 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 charter is posted on Northwest FCS’ website www.northwestfcs.com.
Compensation Committee
This committee consists of the board Chair and Vice Chair, at least one outside director, and five
other board members selected by the board Chair in consultation with the Vice Chair and an
outside director. Neither the CEO nor any member of management can be involved in the selection
of committee members nor can they participate in any deliberations of the committee on matters
relating to their own compensation.
The committee is responsible for reviewing and recommending for full board approval the
performance goals for the CEO and the evaluation of the CEO’s performance against those goals.
It also recommends to the board all actions necessary to administer the CEO’s compensation,
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benefits and perquisites 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 compensation of those senior officers within board approved guidelines.
However, the CEO must review the compensation levels for each senior officer with the
Compensation Committee before it becomes effective. The committee also reviews and
recommends for board approval any short- or long-term incentives to be awarded to senior officers
under the terms of their compensation plan. The committee is also responsible for director
compensation and for oversight of Northwest FCS’ employee salary structure, benefit plans, all
board policies applicable to those plans and other human resource matters not specifically
assigned to other committees.
Risk Committee
This committee provides oversight for the majority of the enterprise risk management practices of
the association. This committee reviews credit portfolio policies and management reports that
monitor compliance with these policies. It also acts on behalf of the board on certain delegated
credit related matters. The committee reviews and recommends to the full board for approval
underwriting standards and portfolio and lending limit policies which guide all of Northwest FCS’
lending and credit related activities. In addition to monitoring the overall credit characteristics of
the industries Northwest FCS serves and the existing portfolio, the committee also reviews and
recommends to the full board for approval certain credit related actions that exceed management’s
delegated authority. This committee also oversees key risk areas associated with budget,
operations, technology, funding, interest rate, liquidity, capital management as well as those risks
associated with its alliance partners and counterparties.
Strategy Committee
This committee provides oversight in developing and monitoring the association’s strategic and
business plans in accordance with Northwest FCS’ mission, policies and procedures. It is
responsible to ensure board planning sessions and the association’s overall strategic planning
processes serve as foundations for the business plan. This specifically includes evaluating potential
benefits, costs, risks and strategies for considering opportunities such as emerging technologies,
product development, joint ventures, strategic alliances, mergers and acquisitions. The committee
oversees marketing, advertising, community support and state legislative activities. It provides
oversight of the Local Advisor program, Crop Insurance, Business Management Center and
Knowledge Center. The committee also evaluates management’s assessment of the association’s
internal strengths and weaknesses and external factors such as economic, competitor and political
trends. The committee’s authority is generally limited to investigation, development of proposed
positions, and making recommendations to the full board for approval when appropriate.
Northwest FCS Directors
The following represents information regarding the directors of Northwest FCS, including their
principal occupations, business experience and any business in which they serve on the board of
directors or as a senior officer. All directors are elected to serve five year terms and are limited to
serving three full terms. Unless otherwise noted, the principal occupation, business experience and
employment of the directors over at least the past five years is related to their farming, ranching
or aquatics operations described below.
Rick Barnes – Callahan, California
Elected in 2010; term expires 2015. Member of Risk (Chair), Strategy and Governance
Committees.
Principal Occupation/Experience: Owner/Operator, Limerock Ranch, a cow-calf operation with
some timber. Also produces grass hay for the horse market.
Other Affiliations: Director, Siskiyou Resource Conservation District and Life-Member of the Cal
Aggie Alumni Association.
Christy Burmeister-Smith – Newman Lake, Washington
Board-Elected Outside Director
Elected in 2010; term expires 2015. Serves as the designated “financial expert’ on the Northwest
FCS board. Member of Audit (Chair), Compensation and Governance Committees.
Principal Occupation/Experience: Vice President-Controller and Principal Accounting Officer at
Avista Corporation, a provider of energy services.
Other Affiliations: Director, Avista Foundation, a community investment program providing
funding to non-profit organizations; Director, YWCA of Spokane, a social services provider.
Drew Eggers – Meridian, Idaho
Elected in 2001; term expires 2014. Member of Audit (Vice Chair) and Strategy Committees.
Principal Occupation/Experience: Owner/operator, Drew Eggers Farms. Raises peppermint,
spearmint, winter wheat and silage corn.
Other Affiliations: Previously served as Chairman, Leadership Idaho Agriculture Foundation.
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Jim Farmer – Nyssa, Oregon
Elected in 2010; term expires 2015. Member of Audit and Compensation Committees.
Principal Occupation/Experience: President and co-owner of Fort Boise Produce, a family
held corporation that packs and markets fresh onions. Secretary and co-owner of Deseret Farms, a
family held corporation that produces onions, wheat, field corn and dry edible beans for seed. Co-
owner of farmland and other real estate with brother, Warren Farmer.
Other Affiliations: Secretary/Treasurer and Director, Nyssa Rural Fire Protection District.
Mark Gehring – Salem, Oregon
Elected in 2010; term expires 2015. Member of Strategy (Vice Chair) and Audit Committees.
Principal Occupation/Experience: Owner/operator, Gehring Farms; Managing Member, Gibson
Creek Farms, LLC. Raises Marionberries, blackberries, radish seed, wheat and turf grass seed.
Other Affiliations: Co-founder and past chairman of the board of RS Growers, Inc. and
RainSweet, Inc., a Salem, OR fruit and vegetable processor.
David Hedlin – Mt. Vernon, Washington
Elected in 2006; term expires 2016. Serves as Vice Chair of the board of directors. Member of
Governance (Vice Chair), Audit and Compensation Committees.
Principal Occupation/Experience: Owner/Partner, R C Koudal Land Co. Raises vegetable seed,
pickling cucumbers, pumpkins and wheat.
Other Affiliations: Board Member, Northwest Ag Research Foundation, Skagitonians to Preserve
Farmland, and Skagit Valley Culinary Arts; Commissioner, Skagit County Dike District #9.
John Helle - Dillon, Montana
Elected in 2012; term expires 2017. Member of Strategy (Chair), Audit and Governance
Committees.
Principal Occupation/Experience: Owner, Helle Livestock, a commercial and purebred sheep
operation. Partner in Rebish and Helle and Village Vista, LLC, land management and farms small
grains and hay. Part owner in Duckworth, LLC, a vertically integrated apparel company taking wool
from sheep to shelf.
Other Affiliations: None.
Herb Karst – Sunburst, Montana
Elected in 2008; term expires 2018. Member of Compensation and Risk Committees.
Principal Occupation/Experience: President and Manager, Karag, Inc., a family-held
corporation producing wheat, malting barley and other crops on a 4,300 acre farm in the joint
venture 1927 Homestead. Barley production consultant with Heineken International.
Other Affiliations: Board Member, The Farm Credit Council, a Farm Credit System trade
association handling legislative and regulatory matters.
Bruce Nelson – Spokane, Washington
Elected in 1999; term expires 2014. Member of Compensation and Risk Committees.
Principal Occupation/Experience: Owner/Manager, Nelson Farms, Inc., Silver Creek Farms,
Inc., and Twin Buttes Farms, Inc., raising several varieties of wheat, peas, lentils, barley and
nursery trees.
Other Affiliations: Director, Washington’s Nature Conservancy Board; Director, Second Harvest
Food Bank; Ag Advisory Board Member for Congresswoman Cathy McMorris Rodgers.
Dave Nisbet – Bay Center, Washington
Board-elected stockholder director
Elected in 2007; term expires 2017. Member of Risk (Vice Chair) and Strategy Committees.
Principal Occupation/Experience: Owner, Nisbet Oyster Co., Inc.; President and CEO, Goose
Point Oysters, Inc., and Hawaiian Shellfish, LLC. Operates a shellfish processing plant, hatchery
and grows Pacific oysters.
Other Affiliations: Director, Pacific Shellfish Institute; Industry Advisory Board Member, Oregon
State University Coastal Oregon Marine Experiment Station (COMES).
Kevin Riel – Yakima, Washington
Elected in 2007; term expires 2017. Member of Risk and Strategy Committees.
Principal Occupation/Experience: President, Double R Hop Ranches, Inc., President, Trigen
Enterprises, Inc., Managing Partner, WLJ Investments LLC, and 4K Investments, LLC. Farming
operations raising hops, apples and Concord grapes.
Other Affiliations: Director, Hop Growers of America.
Karen Schott – Broadview, Montana
Elected in 2006; term expires 2016. Serves as Chair of the board of directors. Member of
Governance (Chair) and Compensation Committees.
Principal Occupation/Experience: Owner/Secretary, Bar Four F Ranch, Inc. Raises winter
wheat, spring wheat, safflowers, and peas.
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Other Affiliations: Advisory Board Member, Southern Montana Experiment Station; President,
Broadview Community Center Board; Treasurer, Stillwater County 4-H Leaders Council.
Julie Shiflett – Spokane, Washington
Board-Elected Outside Director
Elected in 2008; term expires 2018. Serves as the alternate to the designated “financial expert” on
Northwest FCS’ board. Member of Compensation (Chair), Governance and Risk Committees.
Principal Occupation/Experience: Executive Vice President and Chief Financial Officer, Red
Lion Hotels; founding partner of Northwest CFO, which assists emerging and mid-market
companies to increase cash flow, profitability, sales, and company value; past CFO for Signature
Genomic Laboratories and Columbia Paint and Coatings.
Other Affiliations: Director and Audit Committee Chair, American Chemet Corporation, a powder
based chemicals manufacturer. Past Chair of Deaconess Medical Center Board of Trustees.
Shawn Walters – Newdale, Idaho
Board Elected in 2010 to fill remaining term of vacated director position. Elected in 2011; term
expires 2016. Member of Compensation (Vice Chair) and Audit Committees.
Principal Occupation/Experience: Owner, Shawn Walters Farms, Inc.; Co-Owner, Walters
Produce, Inc.; Partner in Walters & Walters, Aristocrat Farms, Idaho Grain Producers, Walters
Osgood Farms, LLC, and Walters Family Limited Partnership. Operates a fresh pack potato facility,
grows potatoes, wheat, barley, alfalfa and canola seed. Member of Growmark, a cooperative
providing potato marketing.
Other Affiliations: Director, Enterprise Canal; Director, Idaho Business Council.
Compensation of Directors
Director compensation is under the oversight of the board’s Compensation Committee. The
committee conducts periodic director compensation studies to identify current compensation paid
to directors of Farm Credit and other similar entities. Based upon these studies, the Compensation
Committee recommends for approval adjustments to director compensation including any pay
differentials paid to the Chair or other key board positions. Absent such a study, board policy limits
any adjustment to director compensation to the cost of living index published each year by FCA.
Increases to director compensation typically become effective May 1 of each year.
Director compensation in May 2013 was set at a rate of $49,774 per year. The board Chair and
Chairs of both the Audit and Compensation Committees are paid $54,751. This represents an
additional 10 percent, and reflects their unique responsibilities and significant additional time
demands of these three positions. Director compensation paid annually to all directors was
increased by $976 ($1,073 in the case of the Chair of the board and the Chairs of the Audit and
Compensation Committees). Each director receives a monthly retainer of $4,148 and the board
Chair and Chairs of the Audit and Compensation Committees receive a monthly retainer of $4,563.
No additional per diem is paid for attendance at Northwest FCS’ meetings or functions. If a director
is not able to attend a regular monthly board meeting, then the director only receives the monthly
retainer if attendance at or performance of other official business during that month warrant that
payment. In addition, Northwest FCS purchases an Accidental Death and Disability policy for each
director.
Directors and senior officers are reimbursed for reasonable travel expenses and related expenses
while conducting association business. In addition, directors are allowed reimbursement for
expenses related to their spouse attending the Annual Stockholder and Local Advisors Meeting,
summer planning session, the December board meeting and one national meeting each year.
Directors’ spouse travel expenses may also be reimbursed for the legislative fly-in, if the spouse
participates in Congressional visits. In all other cases, spouse expenses are reimbursed only if
attendance at a meeting is preapproved by the board. The aggregate amount of expenses
reimbursed to directors in 2013 was $116,238 compared to $106,789 in 2012 and $137,382 in
2011. The Director Compensation policy is available and will be disclosed to stockholders upon
request.
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Information for each director for the year ended December 31, 2013, is as follows:
Senior Officers Listed below are the CEO and eight senior officers of Northwest FCS who served during 2013.
These senior officers reported to the CEO and were on the Management Executive Committee
(MEC) of Northwest FCS. Information is provided on the experience of these senior officers, as well
as on any business for which they serve on the board of directors or act as a senior officer and the
primary business of that organization.
Phil DiPofi, President and CEO
Mr. DiPofi has served as President and CEO since January 1, 2011. Prior to that, he held various
senior officer positions with CoBank. Mr. DiPofi currently serves on the board of Financial Partners,
Inc. (FPI) which provides technology support for Farm Credit institutions, including Northwest FCS.
He also serves on the board of Second Harvest Food Bank in Spokane, Washington. Second
Harvest leads a network of 250 neighborhood food banks and meal centers throughout Eastern
Washington and North Idaho. During 2013 Mr. DiPofi served on the board of directors of Greater
Spokane Incorporated, a regional chamber of commerce and economic development organization.
Jim Allen, Senior Vice President-Capital Markets
Mr. Allen has served as Senior Vice President-Capital Markets since the unit’s inception in 1995.
Prior to that, he held various positions for Northwest FCS since being hired in 1978.
Fred DePell, Executive Vice President-Financial Services
Mr. DePell has served as Executive Vice President-Financial Services since 1992. Prior to that, he
held various positions for Northwest FCS since being hired in 1978. Mr. DePell serves on the board
of directors of the YMCA of the Inland Northwest headquartered in Spokane, Washington. The
YMCA is part of the largest not-for-profit community service organizations in America, working to
meet the health and social service needs of men, women and children.
Brent Fetsch, Senior Vice President-Chief Strategy Officer and Chief Information
Officer
Mr. Fetsch has served as Senior Vice President-Chief Strategy Officer and Chief Information Officer
since January 2011. Prior to that, he was Senior Vice President-Community Lending and also held
various positions for Northwest FCS since being hired in 1987. Mr. Fetsch serves on the board of
directors of Spokane County United Way and chairs its administrative and finance committee.
Spokane County United Way works with nonprofits, government, businesses and community
partners to provide support to those in need.
Stacy Lavin, General Counsel
Mr. Lavin has served as General Counsel since May 2011. Prior to that, he was Assistant General
Counsel. Mr. Lavin has worked for Northwest FCS since 2001.
Tom Nakano, Executive Vice President-Chief Financial Officer
Mr. Nakano has served as Executive Vice President-Chief Financial Officer since October 2004. He
was recently named Executive Vice President-Chief Administrative and Financial Officer effective
January 1, 2014. Prior to 2004, he was Vice President-Loan Accounting and Operations and held
various positions for Northwest FCS since being hired in 1993. Mr. Nakano serves on the Farm
Credit Foundations Consolidated Benefit Trust Committee. This committee oversees the fiduciary
and plan administrative responsibilities of the medical and welfare benefit plans offered by a
number of Farm Credit employers, including Northwest FCS. He also serves as a board member of
the Oregon State University Alumni Association which engages alumni and friends to promote the
advancement of the university and build alumni membership, programs and value-added services.
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Mark Nonnenmacher, Executive Vice President-Agribusiness
Mr. Nonnenmacher has served as Executive Vice President-Agribusiness since April, 2012. Mr.
Nonnenmacher has over 26 years of experience in the System, most recently at CoBank managing
the agribusiness lending operations of their Western Region. He serves as a director on the
University of Montana - College of Forestry Advisory Board. This board provides input to the Dean
for program composition, as well as outreach and communication. Mr. Nonnenmacher also serves
on the Idaho Cooperative Council Board, providing industry awareness, education and political
involvement in support of Idaho cooperatives.
Kathy Payne, Executive Vice President-Human Resources and Corporate
Administration
Ms. Payne has served as Executive Vice President-Human Resources and Corporate Administration
since July 2011. Prior to that she served as Executive Vice President-Human Resources and
Marketing, in a lead position in the Human Resources department since 1992 and in various other
positions since being hired in 1988. Ms. Payne serves on the board of directors of Farm Credit
Foundations and the Plan Sponsor Committee which oversees the plan design and non-fiduciary
responsibilities associated with the benefit plans offered by a number of Farm Credit employers,
including Northwest FCS.
John Phelan, Executive Vice President-Chief Risk Officer
Mr. Phelan has served as Executive Vice President and Chief Risk Officer since January 2011. Prior
to that, he was Senior Vice President-Commercial Lending and held various positions with
Northwest FCS since being hired in 1992.
Compensation of CEO and Senior Officers
Executive Compensation - Summary
Our compensation program for the President and CEO (CEO) and Senior Officers of Northwest FCS
is designed to reward management for performance that builds long-term value for our
stockholders, fulfills our mission, ensures safety and soundness of our organization and enhances
the value of our cooperative. We accomplish this by tying a significant portion of compensation for
our leadership team to balanced scorecards of performance measures that are consistent with our
strategy and mission.
To demonstrate our commitment to align compensation with strong governance practices that are
in our stockholders’ interests, the goal of the Compensation Committee (Committee) is to ensure:
A strong linkage between pay and performance of the organization,
Multiple-year measurements are used to reward for sustained performance,
Competitive compensation through market data review,
The overall compensation program design, including incentive plans, does not encourage
excessive risk taking, and
Best governance practices are followed.
Compensation Philosophy and Objectives
Our compensation program is intended to:
Support a strong and enduring cooperative enterprise,
Successfully execute our mission,
Reinforce a high-performance culture through pay for performance,
Attract and retain talented staff needed to achieve our mission, and
Provide competitive total compensation opportunities that balance current rewards with long-
term opportunities, and provide security contingent upon performance.
Linking Pay and Performance
Our framework for compensation is designed to pay for performance. To achieve competitive
compensation levels, our management must achieve strong results across multiple measures of performance. As a result, a large percentage of compensation is “at risk” – if Northwest FCS results
are below our plan, compensation paid will be less than competitive levels. The at-risk component
of compensation is provided through short- and long-term incentives while the “fixed” portion is
salary and benefits, as explained below.
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Program Design
Our compensation program for the CEO and Senior Officers has four components:
Component Purpose
Salary Pay a competitive salary to reward for experience, skills and performance.
Provide a competitive basis for other rewards based on salary.
Short-Term
Incentive Plan
(STIP)
Reward for accomplishing annual Northwest FCS’ goals that over time result
in long-term success. Reward for profitability, return on stockholder equity,
loan quality, expense control, and achieving strategic goals. Reward for
individual employee contributions.
Long-Term
Incentive Plan
(LTIP)
Reward for sustained performance, safety and soundness of Northwest FCS.
Reward for achieving multiple-year Northwest FCS’ goals for profitability,
return on stockholder equity, loan quality, capital adequacy and achieving
strategic goals. Retain top performers based on performance.
Benefits Provide financial security and convenience for our employees through a
competitive benefits program and limited perquisites; considered “indirect”
compensation.
Total Each component and the total compensation package is managed to be
competitive and ensure a linkage to performance.
Performance Assessment
A framework of multiple performance metrics and goals and individual performance assessment
reinforces our pay for performance philosophy. This framework balances annual and multiple-year
performance measures. The STIP is based upon multiple measures of performance, including an
individual performance factor. The LTIP is based on various performance measures over multiple
years of organizational results.
The following table summarizes the scorecards for each plan:
Component Weight Measure/Goal Performance Period
STIP 30%
20%
20%
10%
20%
After-tax Net Income
Return on Equity
Adverse Assets/Risk Funds
Efficiency Ratio
Strategic Business Objectives
Annual
LTIP 15%
15%
25%
20%
25%
After-tax Net Income
Return on Equity
Adverse Assets/Risk Funds
Core Capital
Strategic Business Objectives
Multiple-Year
At the beginning of each performance period, the Committee approves financial targets and goals
for each category, including minimum levels of performance required in order for an award to be
earned in each category, and maximum levels of performance on which incentive will be paid. The
approved financial targets and goals are aligned with the organization’s business plan financial
metrics to ensure Senior Officer incentives match business plan objectives. In addition, a minimum
Return on Assets threshold must be achieved before any incentives are earned. The Committee has discretion to adjust awards or performance assessments as needed to ensure
rewards appropriately represent our pay for performance philosophy.
In addition to the measures and goals listed above, the adjustments to base salary and STIP
awards are impacted by the individual performance of the participant. As a part of the Northwest
FCS’ performance management process, all employees are provided performance reviews and in
the case of the CEO, the performance review is conducted by the Committee with input and
approval by the Board of Directors.
2013 Compensation Decisions
All Senior Officers appointed to serve on the Management Executive Committee (MEC) participate
in the STIP and LTIP. The target awards for the STIP range from 15 percent to 60 percent of
salary and the actual STIP awards may range from 0 percent to approximately two times the
target award, depending upon Northwest FCS’ performance and individual performance. STIP
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awards are paid in the year following the performance period, after the Committee approves
achievement of financial targetsand goals. Target awards for the LTIP range from 20 percent to 60
percent of salary with a range of opportunity from 0 percent up to two times the target award.
An LTIP was implemented in 2012 with a plan that is based upon 2012-2013 performance. In
addition, to facilitate the transition from the prior LTIP to the new LTIP, a one-year “stub plan”
was implemented based upon 2012 performance. LTIP awards for the 2012 “stub plan” were paid
in 2013 based upon the 2012 performance period. The 2012-2013 LTIP awards will be paid in
2014 and disclosed in the Senior Officer Compensation table to reflect performance for 2012-2013.
In the future, awards will be based upon multiple years of performance, and current plans include
the 2013-2014 “Stub” LTIP and 2013-2015 LTIP.
The measures used in incentive compensation are what we believe to be the key drivers of
Northwest FCS’ long-term success and are directly correlated to the pay received by Senior
Officers. Components of Senior Officer compensation increased or decreased in 2013 based on the
level of achievement of these goals, which are tied to Northwest FCS’ mission and strategy. To calculate incentive awards, Northwest FCS aggregates the performance under each plan and
calculates a separate Corporate Performance Factor for the STIP and LTIP. For the STIP, individual
performance is assessed (see Performance Assessment above) and used to determine an
Individual Performance Factor used in the incentive award calculation.
Actual awards under the STIP and LTIP for the CEO and Senior Officers were determined as
follows:
Actual STIP and LTIP awards earned for the President and CEO and other Senior Officers are
presented in the Summary Compensation Table below.
Encouraging Appropriate Risk Taking
Our compensation program is structured to provide a balance of components that are based upon
multiple financial and non-financial measures of performance. It is designed to encourage the
appropriate level of risk-taking, consistent with maintaining safety and soundness and
measurements aligned with our business strategy and mission. The Committee has taken the
following measures to ensure our compensation program does not encourage inappropriate risk
taking:
Implemented caps on incentive plans,
Balanced incentive compensation through a STIP and LTIP,
Designed our incentive plans to provide rewards based upon multiple financial and non-
financial measures and goals,
Incorporated individual performance into the STIP based upon our performance management
system,
Engaged an independent consultant to conduct a risk review of our compensation and benefit
programs,
Approved performance targets and ranges for STIP and LTIP metrics that align with our
business plan, strategy and mission, and
Retained discretion to adjust awards as needed.
Compensation Governance Process and Decisions
The Committee is composed of members of our Board of Directors and recommends CEO
compensation decisions to the Board. In carrying out its responsibilities, the Committee regularly
reports to and consults with the Board and, when appropriate, discusses compensation matters
with the CEO. The Committee reviews pay and performance matters throughout the year with the
assistance of management and its independent consultant. The Committee’s process includes:
Selecting and approving performance measures for the STIP and LTIP balanced scorecards,
Reviewing mid-year performance results and accruals of STIP and LTIP awards,
Reviewing corporate performance against approved goals and determining final achievement,
Assessing CEO performance and reviewing Senior Officer performance assessments
conducted by the CEO,
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Determining and approving each component of CEO compensation for the next fiscal year
using market comparisons and performance assessments,
Approving actual awards under incentive programs for the CEO based upon performance
assessments,
Approving overall compensation plans and any design changes to compensation programs for
the annual compensation period,
Reviewing and approving programs that provide benefits or potential benefits to management
such as employment agreements, severance benefits and other benefit programs, and
An annual assessment of the risk of programs to ensure the operation of the programs does
not create a material adverse risk to the organization.
In conducting its responsibilities as determined by the Board, the Committee has reviewed and
concluded that:
Long-term compensation and retirement benefit obligations are appropriate for the
participants in the plans and their roles and responsibilities,
Incentive programs are not unreasonable or disproportionate to the services provided by
Senior Officers and other employees of Northwest FCS, and
Levels and design of Senior Officer total compensation align with Northwest FCS’ strategy.
CEO Compensation
The Committee reviews the CEO’s total compensation based on the CEO’s performance, Northwest
FCS’ performance and market considerations prepared by the independent consultant. Market
considerations include compensation for CEOs of comparable financial institutions, including other
Farm Credit System entities, approved by the Committee annually. The CEO participates in the
STIP and LTIP programs provided for Senior Officers of Northwest FCS, in addition to receiving
salary and benefits. The CEO’s STIP potential in 2013 was a target of 60 percent to be awarded for
meeting these pre-established goals described above, with the opportunity to earn up to
approximately two times for exceeding those goals. The CEO’s LTIP award potential was a target
of 60 percent to be awarded for meeting pre-established goals, with a maximum award of two
times for exceeding the goals.
The “Short-term Incentive Compensation” shown in the table below reflects the STIP earned by
the CEO in each year. The “Long-term Incentive Compensation” shown for 2011 reflects the LTIP
award earned by the CEO together with any gains or losses incurred on these funds while held in
Trust. The 2012 LTIP represents the “stub plan” award for achievement of performance goals
during 2012 and 2013 represents the 2012-2013 two-year “stub” LTIP award for achievement of
performance goals during 2012-2013. In the future, awards will be based upon multiple years of
performance, and current plans include the 2013-2014 LTIP and 2013-2015 LTIP.
Because the President and CEO was not able to participate in Northwest FCS’ Defined Benefit
Pension Plan, in addition to his compensation outlined above, Northwest FCS makes an annual
contribution to his Non-Qualified Defined Contribution Plan. The amount is equal to the lesser of
$200,000 or 15 percent of the total of his base salary and short-term incentive award each year. It
is reported under “Deferred and Perquisites” in the table below. The amounts earned related to
this award were $161,561, $145,092 and $120,000 for the years ended December 31, 2013, 2012
and 2011, respectively.
As of December 31, 2013, the President and CEO is employed pursuant to an employment
agreement, which provides specified compensation and related benefits in the event his
employment is terminated, except for termination for cause. In the event of termination except for
cause, the employment agreement provides for (a) payment of his prorated salary and incentives
and (b) payment of three times his base compensation. The employment agreement also provides
certain limited payments upon death or disability. To receive payments and other benefits under
the agreement, the President and CEO must sign a release agreement to give up any claims,
actions or lawsuits against Northwest FCS that relate to his employment with Northwest FCS. The
agreement also provides for non-solicitation by the President and CEO for 24 months following
termination of employment.
Senior Officer Compensation
Senior Officers participate in the STIP and LTIP in addition to receiving base salary and benefits
generally provided to management personnel. The Committee reviews the Senior Officers’ total
compensation based on their individual performance assessments provided by the CEO, Northwest
FCS’ performance and market considerations prepared by the independent consultant using the
same comparable financial institutions as used for the CEO’s compensation. The STIP and LTIP
provide Senior Officers the opportunity to earn awards as a percent of their base salaries for
meeting pre-established performance goals. For 2013, STIP targets ranged from 15 percent to 35
percent, with the potential to earn a maximum of 30 percent to approximately 70 percent for
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exceeding those goals, and LTIP targets ranged from 20 percent to 40 percent, with the potential
to earn a maximum of 40 percent to 80 percent for exceeding those goals.
As of December 31, 2013, the Senior Officers are provided specified severance and other benefits
in the event their employment is terminated, except for termination for cause. In the event of
termination, except for cause, a Senior Officer is entitled to a lump sum severance payment equal
to one times base compensation. To receive the severance payment, the Senior Officer must sign a
release agreement to give up any claims, actions or lawsuits against Northwest FCS that relate to
their employment with Northwest FCS. The agreement also provides for non-solicitation by the
Senior Officer for 24 months following termination of employment.
Summary Compensation Table
On October 3, 2012, the FCA adopted a regulation that requires all System institutions to hold non-
binding advisory votes on the compensation for all Senior Officers and/or the CEO when the
compensation of either the CEO or the Senior Officer group increases by 15 percent or more from
the previous reporting period. In addition, the regulation requires associations to hold a non-
binding advisory vote on CEO and/or Senior Officer compensation when 5 percent of the voting
stockholders petition for the vote and to disclose the petition authority in the annual report to
shareholders. The regulation became effective December 17, 2012, and the base year for
determining whether there is a 15 percent or greater increase was 2013. No association has held
an advisory vote based on a stockholder petition in 2013.
On January 17, 2014, the President of the United States signed into law the Consolidated
Appropriations Act which includes language prohibiting the FCA from using any funds available to
“to implement or enforce” the regulation. In addition, on February 7, 2014, the President of the
United States signed into law the Agricultural Act of 2014. The law directs the FCA to within 60
days of enactment of the law “review its rules to reflect the Congressional intent that a primary
responsibility of boards of directors of Farm Credit System institutions, as elected representatives
of their stockholders, is to oversee compensation practices.” The FCA has not yet taken any action
with respect to their regulation in response to these actions.
The compensation shown in the table below is the actual compensation earned by the CEO and
Senior Officers during the years ended December 31, 2013, 2012, and 2011. The short-term
incentive compensation shown reflects the short-term incentive earned in each year, which is paid
in the following year, once final year-end financial performance has been determined. The
“Deferred Award” shown reflects the long-term awards in the year they were earned, together with
any gains or losses incurred, where applicable, on those awards that were held in trust. The first
award from the new LTIP represents the one year “stub plan” award for performance against pre-
established goals for 2012 when this plan was implemented to facilitate the transition from the
prior LTIP to the new LTIP.
(1) Represents the STIP previously described for 2013 and 2012 which is paid in the first quarter
of the year subsequent to the reported year to persons who continue to be employed by
Northwest FCS or unless otherwise provided for. The 2012 year includes a signing bonus for an
executive hired within that year. For 2011 these balances include prior short-term incentive plans
in place during that year.
(2) Represents the LTIP described previously for the 2012-2013 stub year (presented within 2013)
and the 2012 stub year (presented in 2012). In addition in 2011, the amounts include awards
granted in that year for a previously existing plan. The 2011 awards will be paid in early 2015 as
the previously existing plan requires a delay in the payment of the award. During the years ended,
2013, 2012, and 2011, plan balances which became vested related to this plan by senior officers
totaled $178,894, $185,066 and $179,550 for awards granted in 2010, 2009, and 2008,
respectively. The market value adjustments on the balances while held in trust are included in
each respective year the balances were held in trust. The information presented for 2012 and 2011
also includes payments to certain Senior Officers for a separate prior plan.
(3) Various deferred or perquisite amounts including, but not limited to, the CEO Non-Qualified
Defined Contribution Plan discussed previously, other non-qualified contributions made by
Northwest FCS, vacation adjustments, and vehicle allowances.
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(4) Represents 401(k) employer contributions, other compensation of minimal value for all senior
officers and the change in pension value for one Senior Officer.
(5) There were no individuals outside of the Senior Officers during the years noted which required
disclosure.
Total compensation paid during the last fiscal year to any Senior Officer, or to any other employee
included in the aggregate, is available and will be disclosed to stockholders upon request. Senior
Officers are reimbursed for travel expenses and related expenses while conducting business for
Northwest FCS and the travel policy is available and will be disclosed to stockholders upon request.
Shareholders may petition for a non-binding advisory vote on the CEO and Senior Officer
compensation. When 5 percent of the voting shareholders petition for a vote on Senior Officer
compensation, a non-binding advisory vote must be held.
The table below provides certain pension information by plan for the only Senior Officer
participating in the plans. There were no individuals outside of the Senior Officer during the years
noted which required disclosure and the CEO is not a participant in these plans.
The actuarial present values of accumulated benefits for plans noted within the table are funded
by Northwest FCS.
The Defined Benefit Pension Plan (Pension Plan) provides participants with various options at
normal retirement (age 65). Participants may elect to receive a normal retirement benefit upon
retirement or otherwise terminate their employment and satisfy certain conditions. A normal
retirement benefit is based on, but not limited to, the highest consecutive 60 months’ salary and
the participant’s total years of service in the plan (maximum of 35 years). Participants may elect to
receive their accrued vested pension benefits as an annuity or as a single lump sum distribution. A
lump sum distribution includes the present value of a single life annuity based on mortality and
interest rate assumptions defined in the Pension Plan. The Pension Plan provides benefits up to the
applicable limits under Internal Revenue Code (IRC) Sections 401(a) (17) and 415.
The Defined Benefit Pension Restoration Plan (Restoration Plan) provides eligible employees
benefits which were limited by IRC Sections 401(a) (17), 415 or any Code provision or government
regulations subsequently issued, and therefore are not available under the Pension Plan. The
monthly benefit is equal to the difference between the participant’s actual monthly retirement
benefit payment under the Pension Plan and the monthly retirement benefit payment that would
be payable to the participant under the Pension Plan if the limitations of IRC. 401(a) (17), 415, or
any code provision or government regulations subsequently issued, did not apply. The Restoration
Plan valuation was determined using an assumption that benefits will be distributed as a lump sum
at the participants’ earliest unreduced retirement age.
Transactions with Senior Officers and Directors Information regarding related party transactions is incorporated herein by reference from Note 12
to the Consolidated 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, 2014, or at any
time during 2013.
Relationship with Independent Public Auditors There were no changes in independent public auditors since the prior annual report to
stockholders. In addition to audit services, the independent public auditors,
PricewaterhouseCoopers LLP, performed non-audit services for a fee of approximately $9,000 in
2013 and tax services for a fee of approximately $23,000 in 2011. The non-audit services were
approved by the audit committee. There were no similar fees incurred during 2012. 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
public auditors, PricewaterhouseCoopers LLP, were approximately $393,000 at December 31, 2013
and $368,500 at December 31, 2012 and 2011 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, 2013, 2012, and 2011.
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Consolidated Financial Statements The Consolidated Financial Statements, together with the Report of Independent Auditors dated
February 28, 2014, and the Report of Management appearing in this annual report, are
incorporated herein by reference.
Relationship with CoBank, ACB Northwest FCS’ statutory obligation to borrow from CoBank, ACB is discussed in Note 7 of the
Consolidated Financial Statements.
CoBank, ACB’s ability to access the capital of Northwest FCS is discussed in Note 4 of the
Consolidated Financial Statements.
The major terms of any capital preservation, loss sharing or financial assistance agreements
between Northwest FCS and CoBank, ACB are discussed in Notes 2 and 8 of the Consolidated
Financial Statements
A discussion of how the financial condition and results of operations of CoBank, ACB may
materially affect a stockholder investment in Northwest FCS and Northwest FCS’ investment in
CoBank, ACB is discussed in Note 1 of the Consolidated Financial Statements.
CoBank, ACB is required to distribute its annual report to shareholders of Northwest FCS if a
“significant event,” as defined by FCA regulation occurs.
Privacy Protection Afforded Under FCA Regulations Customer financial privacy and the security of other non-public information are important.
Therefore, Northwest FCS holds customer financial and other non-public information in strict
confidence. Federal regulations allow disclosure of such information by Northwest FCS only in
certain situations.
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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
DESCRIPTION AND STATUS REPORT ON THE YOUNG, BEGINNING AND SMALL FARMERS PROGRAM (dollars in thousands, except as noted)
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 are: 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 in annual gross sales of agricultural or aquatic products.
Mission and Objectives
Mission Statement
To advance young, beginning, and small farmers' success via deliberate strategies in lending and
professional development.
Objectives of the Program To support agriculture by encouraging and developing competent YBS customers to enter into
or remain in agriculture by supporting their efforts to do so.
To recognize the challenges facing YBS customers attempting to obtain credit and establish a
viable enterprise and to establish Northwest FCS as a leader in providing the products and
services necessary for them to succeed.
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 and
o Will become profitable customers for the association.
To provide adequate Board oversight to ensure the needs of this market are met on a
constructive, safe, and sound basis.
Services Provided Several credit and related services are offered through the Board approved YBS program directly
and in coordination with other organizations that allow Northwest FCS to effectively serve the
needs within these producer segments: The AgVision program enriches our ability to serve the young, beginning and small producers
who are actively involved in farming and those who may not meet traditional credit
standards. AgVision customers account for approximately $274,000 of loan volume. Through
this program, special consideration is given in loan underwriting ratios, interest rate
reductions, and origination and appraisal fee waivers. More than $1,000 in fee waivers have
been provided to AgVision customers since 2001, with over $70 in fees waived in 2013.
More than $490 has been reimbursed to customers for educational expenses, technology
purchases, recordkeeping and tax planning and preparation services since the 2001 inception
of the AgVision program. Reimbursements totaled $66 in 2013.
We have an advisory group of young, beginning and small farmers and ranchers who provide
Northwest FCS with customer feedback, function as a liaison to association management and
advance YBS program impact within the agricultural community.
Two new programs were introduced in 2013 to YBS customers. The RateWise program
rewards young, beginning and small produces for continuing their management education
with interest rate reductions on new loans. Northwest FCS’ interest only, JumpStart loan
program is designed to help entrepreneurs begin promising new ventures in agriculture
Customer education programs are targeted to young, beginning, and small producers
focusing on areas such as farm economics, financial literacy, profitability, cash flow, personal
finance and succession planning, with several of these workshops conducted in Spanish each
year.
The Northwest FCS’ Business Management Center helps customers assess, understand and
improve management practices through group and individual interactions via orientations,
workshops and consulting. Many YBS customers have taken part in these various workshops.
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Northwest FCS provides donations and sponsors state and local Future Farmers of America
(FFA) and 4-H activities and conventions, agricultural leadership and educational programs
and other youth programs.
In 2013, Northwest FCS awarded over $46 in college scholarships to qualified high school
seniors and $18 in scholarships to college students.
Northwest FCS offers many services including crop insurance, life insurance and debt
protection to help our YBS producers mitigate risk.
A portion of the young, beginning and small loan portfolio is supported by government
guarantees, including guarantees by the Farm Service Agency (FSA) and the U.S. Department
of Agriculture’s (USDA) Business and Industry Guaranteed Loan Program.
Government Guaranteed Loans to YBS Farmers and Ranchers
Regional Demographics The service area of Northwest FCS primarily includes the states of Washington, Montana, Oregon,
Idaho and Alaska. The following table compares demographic information from the USDA’s 2007
Census of Agriculture for young, beginning and small producers in the territory to the 2002 census.
This census is conducted every five years. 2012 Census data will be available in 2014.
Census of Agriculture - Young, Beginning and Small Producers
2007 vs. 2002
The 2007 Census of Agriculture results show a 2 percent increase in young producers, a 3 percent
decrease in beginning producers, and a 1 percent increase in small producers from 2002 to 2007.
YBS Volume in the Northwest FCS Portfolio The following table reflects the percentage of young, beginning and small producers’ loans in the
Northwest FCS loan portfolio as of December 31, 2013. Methods by which the Census
demographics and the Northwest FCS’ data presented differ. The Census data is based on number
of producers, while the Northwest FCS’ data is based on number of loans.
Young, Beginning Small Farmers and Ranchers – Number and Volume of Loans
Outstanding (Including available commitment)
Goals and Results Quantitative targets have been established by Board policy for young, beginning and small
producers’ loan volume and numbers based upon demographic data. These targets are as follows:
2013 Young, Beginning and Small Service Goals & Results
Northwest FCS met its young and small producer loan goals for 2013. The number of loans made
to beginning producers dropped below plan slightly in 2013 even though volume in this category
increased from prior year. Loans made to small producers increased significantly in 2013. The
number of loans exceed the goals during 2013 due to the ProPartners relationship entered into in
2012. As more fully explained in Note 1 to the Consolidated Financial Statements, we participate in
each loan within this relationship and the increase in our number of loans to small producers is
directly related to this relationship.
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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
LOCAL ADVISORS
Idaho Montana Oregon Washington Robert Ball Hamer Les Arthun Wilsall Monet Allen Grenada, CA Dave Allan YakimaCody Bingham Jerome David Bell Great Falls Reed Anderson Brownsville Jeff Bosma OutlookJeff Blanksma, Jr. Hammett Bill Bergin, Jr. Melstone Roben Arnoldus Cove Russ Byerley TouchetAdrian Boer Jerome Mark Bergstrom Brady Glenn Barrett Bonanza Roger Canfield OlympiaRay Carlson Blackfoot Adam Billmayer Hogeland John Boyer Haines Bill Clark ChelanConnie Christensen Blackfoot Bart Bitz Big Sandy Greg Brink Joseph Mike Cobb EphrataBill Clayton Wilder Ryan Bogar Vida Ron Brown Milton-Freewater Bill denHoed GrandviewCade Crapo St. Anthony Keven Bradley Cut Bank George Bussmann Sixes Richard DeRuwe DaytonRon Elkin Buhl Sandy Carey Boulder Warren Chamberlain Vale Frank DeVries LyndenCarl Ellsworth Leadore Tom Cheetham Redstone Jason Chapman Klamath Falls Scott Eschbach YakimaBruce Foster Aberdeen Calvin Danreuther Loma Tim Dahle The Dalles Patrick Escure QuincyDavid Funk Hansen Nels DeBruycker Choteau Dan Dawson Roseburg Kevin Filbrun PascoLeRoy Funk Burley Vicki Eggebrecht Malta Mike DeWall Harrisburg Stacy Gilmore PascoBrent Griffin Rupert Warren Flynn Townsend Susan Doverspike Burns Alan Groff WenatcheeJackie Hillman Hamer Conni French Malta Rod Fessler Madras Lori Hayles PascoBrian Huettig Hazelton Joe Fretheim Shelby Tom Fessler Mt. Angel Jim Kile St. JohnKen Koompin American Falls Scott Glasscock Angela Joe Finegan Cornelius Cris Kincaid PullmanBrent Lott Idaho Falls Beth Granger Great Falls Bruce Ford Hermiston Jim Klaustermeyer OthelloKaren Lustig Cottonwood Greg Grove Moccasin Javier Goirigolzarri Roseburg Dave Klaveano PomeroyMarty Lux Nezperce Chad Hansen Dillon Dennis Harmon Grants Pass Tristan Klesick StanwoodDan Mader Genesee Courtney Herzog Rapelje Matt Insko LaGrande Chris Kontos Walla WallaRay Matsuura Blackfoot Craig Henke Chester Kenneth Jensen Vale Steve Krupke ReardanKyle Meyer Rathdrum Dale Hirsch Kinsey Kyle Kenagy Roseburg David Lange ColfaxRon Mio Fruitland Craig Iverson Winnett Jeremy Kennel Monmouth Josh Lawrence Royal CityGreg Moss Ketchum Alan Klempel Bloomfield Alan Keudell Aumsville Poppie Mantone Lyle Kirk Nickerson Howe Steven Lackman Forsyth David Kunkel Portland Dan McKay AlmiraLisa Patterson Heyburn Tim Lake Polson Leland Lage Hood River Alan Mesman Mt. VernonErick Peterson Moscow Bryan Mussard Dillon Dan C. Lewis Gaston John Miller ToledoNate Riggers Nez Perce Corie Mydland Joliet Sharon Livingston Mt. Vernon Pat Murphy ChehalisRoyce Schwenkfelder Cambridge Ken Olson Richey Bill Martin Rufus Jeff Raap EllensburgKirt Schwieder Idaho Falls Tracey Pearce Twin Bridges Scott McClaran Joseph Sara Rolfs WenatcheeScott Searle Shelley Robert Peterson Hobson Ron Meyer Talent Jason Salvo SeattleTodd Simmons Terreton Trudi Peterson Judith Gap Greg Myers Tillamook Derek Schafer RitzvilleRobert Swainston Preston Shawn Rettig Rudyard David Neal Tangent Jeff Schilter OlympiaRyan Telford Richfield Dave Sattoriva Hingham Mary Olson Monmouth Danielle Scrupps RitzvilleBernie Teunissen Caldwell Nancy Schlepp Ringling Larry Parker Helix Ben Smith SequimDale Thomas Gooding Kim Skinner Hall Alan Parks Silver Lake Jerry Smith Benton CityCamellia Thurgood Nampa Carmie Steffes Plevna Amy Doerfler Phelan Aumsville Lori Stonecipher Walla WallaJustin Tindall Bruneau Steve Swank Chinook John Reerslev Junction City Mark Tudor GrandviewRitchey Toevs Aberdeen Kurt Swanson Valier Stephen Roth Brothers Jake Wardenaar Royal CitySteven Toone Grace Duane Talcott Hammond Shannon Rust Echo Andy Werkhoven MonroeJames Udy American Falls Dale Tarum Richland Marc Staunton MerrillTodd Webb Declo Bob Taylor Denton Anna Sullivan HerefordShane Webster Rexburg Kelly Toavs Wolf Point Steve Walker Stanfield Mark Tombre Savage Eric White Nyssa Miles Torske Hardin Brian Tutvedt Kalispell Larry Tveit, Jr. Fairview Bruce Udelhoven Winifred Mike Wallewein Sunburst Steve Wood Sheridan As of: 2/28/14
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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
OFFICE LOCATIONS Northwest FCS Headquarters 1700 S Assembly Street Spokane, Washington 99224 (509) 340-5300
Idaho Montana Oregon Washington
73 Fort Hall Avenue, Suite AAmerican Falls, ID 83211 208-226-1340
370 N Meridian Street, Suite A Blackfoot, ID 83221 208-782-3800
1408 Pomerelle Avenue, Suite B Burley, ID 83318 208-678-6650
501 King Street Cottonwood, ID 83522 208-962-2280
2225 W Broadway Street, 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 N State Street, Suite 2 Preston, ID 83263 208-852-2145
1036 Erikson Drive Rexburg, ID 83440 208-656-2100
815 N College Road Twin Falls, ID 83303 208-732-1000
139 River Vista Place, Suite 201 Twin Falls, ID 83301 208-732-1000
3490 Gabel Road, Suite 300Billings, MT 59102 406-651-1670
1001 W Oak Street, Suite 200 Bozeman, MT 59772 406-556-7300
519 S Main Street Conrad, MT 59425 406-278-4600
38A S Central Avenue Cut Bank, MT 59427 406-873-9070
134 E Reeder Street Dillon, MT 59725 406-683-1200
501 1st Avenue S Glasgow, MT 59230 406-228-3900
700 River Drive S Great Falls, MT 59405 406-268-2200
1705 US Highway 2 NW, Suite A Havre, MT 59501 406-265-7878
120 Wunderlin Street, Suite 6 Lewistown, MT 59457 406-538-7737
502 S Haynes Avenue Miles City, MT 59301 406-233-3100
3021 Palmer Street, Suite B Missoula, MT 59808 406-532-4900
123 N Central Avenue Sidney, MT 59270 406-433-3920
3370 10th Street, Suite BBaker City, OR 97814 541-524-2920
2345 NW Amberbrook Drive, Suite 100 Beaverton, OR 97006 503-844-7920
650 E Pine Street, 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
308 SE 10th Street Ontario, OR 97914 541-823-2660
12 SW Nye Avenue 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 Hawthorne Avenue SE, Suite 210 Salem, OR 97301 503-373-3000
3591 Klindt Drive, Suite 110 The Dalles, OR 97058 541-298-3400
265 E George Hopper RoadBurlington, WA 98233 360-707-2353
629 S Market Boulevard Chehalis, WA 98532 360-767-1100
224 N Main Street Colfax, WA 99111 509-397-2840
667 Grant Road, Suite 1 East Wenatchee, WA 98802 509-665-2160
1501 E Yonezawa Boulevard Moses Lake, WA 98837 509-764-2700
9530 Bedford Street Pasco, WA 99301 509-542-3720
201 W Broadway Avenue, Suite B Ritzville, WA 99169 509-659-1105
1900 W Nickerson Street, Suite 215 Seattle, WA 98119 206-691-2000
1515 S Technology Boulevard, Suite B Spokane, WA 99224 509-340-5600
2735 Allen Road Sunnyside, WA 98944 509-836-3080
1 W Pine Street Walla Walla, WA 99362 509-525-2400
1360 N 16th Avenue Yakima, WA 98902 509-225-3200
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