northwest farm credit services 2013 annual report

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

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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

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“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.

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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

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“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

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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

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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.

2013 NORTHWEST FARM CREDIT SERVICES, ACA Annual Report to Stockholders

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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

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

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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


Financial Officer

February 28, 2014

Karen Schott

Chair of the Board

February 28, 2014

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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

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FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

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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.

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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

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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.


Phil DiPofi

President and CEO

February 28, 2014

Tom Nakano


Financial Officer

February 28, 2014

Karen Schott

Chair of the Board

February 28, 2014

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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


CONSOLIDATED BALANCE SHEET

15


CONSOLIDATED STATEMENT OF INCOME

16


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

17


CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS’ EQUITY

18


CONSOLIDATED STATEMENT OF CASH FLOWS

19


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.

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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:

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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:

32

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

33

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:

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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

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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:

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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.

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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


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.

52

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.

53

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.

54

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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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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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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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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northwest farm credit services 2013 annual report

Documents

northwest fcs board

northwest agriculture

strong communities

northwest fcs strategy

rural communities

winter wheat

spring wheat

strong growth