ALLOWANCE FOR LOSSES AND CONCENTRATIONS OF CREDIT RISK

Allowance for Losses

Farmer Mac maintains an allowance for losses to cover estimated probable losses on loans held and loans underlying LTSPCs and Farmer Mac Guaranteed Securities. As of December 31, 2011 and 2010 Farmer Mac recorded specific allowances for losses of $7.3 million and $7.4 million, respectively. No allowance for losses has been provided for the Farmer Mac II and Rural Utilities programs and Farmer Mac I AgVantage securities as of December 31, 2011 or 2010. See Note 2(j), Note 5 and Note 12 for more information about Farmer Mac Guaranteed Securities. Farmer Mac's allowance for losses is presented in two components on its consolidated balance sheets:


•	an "Allowance for loan losses" on loans held; and


•	an allowance for losses on loans underlying LTSPCs and Farmer Mac Guaranteed Securities, which is presented as "Reserve for losses" on the consolidated balance sheets.

The following is a summary of the changes in the allowance for losses for each year in the three-year period ended December 31, 2011:



	Allowance for Loan Losses			Reserve for Losses			Total Allowance for Losses
	(in thousands)
Balance as of January 1, 2009	$	10,929		$	5,506		$	16,435
Provision for losses	2,853			2,389			5,242
Charge-offs	(8,491		)	—			(8,491		)
Recoveries	1,001			—			1,001
Balance as of December 31, 2009	$	6,292		$	7,895		$	14,187
Provision for losses	1,893			2,417			4,310
Charge-offs	(605		)	—			(605		)
Recoveries	2,223			—			2,223
Balance as of December 31, 2010	$	9,803		$	10,312		$	20,115
Provision for/(release of) losses	610			(2,957		)	(2,347		)
Charge-offs	(252		)	—			(252		)
Balance as of December 31, 2011	$	10,161		$	7,355		$	17,516

During 2011, Farmer Mac recorded provisions to its allowance for loan losses of $0.6 million and releases from its reserve for losses of $3.0 million. In 2011, Farmer Mac purchased two defaulted loans pursuant to the terms of an LTSPC agreement. This resulted in the reclassification of $1.8 million of specific allowance, which had been recorded in 2010, from the reserve for losses to allowance for loan losses. The provision for/(release of) losses for 2011 reflects this reclassification as well as the decline in the estimated probable losses related to Farmer Mac's exposure to the ethanol and dairy industries. Farmer Mac also recorded charge-offs of $0.3 million to its allowance for loan losses during 2011.

During 2010, Farmer Mac recorded provisions to its allowance for loan losses and its reserve for losses of $1.9 million and $2.4 million, respectively. These amounts include the reclassification of $2.0 million from the reserve for losses to the allowance for loan losses upon adoption of new consolidation guidance in first quarter 2010. Farmer Mac also recorded charge-offs of $0.6 million and recoveries of $2.2 million to its allowance for loan losses during 2010.

During 2009, Farmer Mac recorded provisions to its allowance for loan losses and its reserve for losses of $2.9 million and $2.4 million, respectively. Farmer Mac also recorded charge-offs of $8.5 million and recoveries of $1.0 million to its allowance for loan losses during 2009.

The following table presents Farmer Mac's reserve for losses for off-balance sheet Farmer Mac I Guaranteed Securities and LTSPCs as of December 31, 2011 and 2010:



	As of December 31,
	2011		2010
	(in thousands)
Off-balance sheet Farmer Mac I Guaranteed Securities	$	364	$	635
LTSPCs	6,991		9,677
Total reserve for losses	$	7,355	$	10,312

The following tables present the ending balances of loans held and loans underlying LTSPCs and Farmer Mac Guaranteed Securities and the related allowance for losses by impairment method and commodity type as of December 31, 2011 and 2010:



	As of December 31, 2011
	Crops			Permanent Plantings			Livestock			Part-time Farm			AgStorage and Processing (including ethanol facilities)			Other			Total
	(in thousands)
Ending Balance
Evaluated collectively for impairment	$	1,835,439		$	796,100		$	1,213,227		$	232,607		$	167,850		$	15,914		$	4,261,137
Evaluated individually for impairment	29,520			28,245			10,884			12,513			5,842			1,022			88,026
	$	1,864,959		$	824,345		$	1,224,111		$	245,120		$	173,692		$	16,936		$	4,349,163
Allowance for Losses
Evaluated collectively for impairment	$	1,723		$	1,290		$	172		$	775		$	6,256		$	4		$	10,220
Evaluated individually for impairment	2,410			2,075			513			448			1,850			—			7,296
	$	4,133		$	3,365		$	685		$	1,223		$	8,106		$	4		$	17,516

For the Year Ended:
Beginning Balance	$	3,572		$	3,537		$	2,749		$	445		$	9,797		$	15		$	20,115
Provision for/(release of) losses	737			(165		)	(2,000		)	783			(1,691		)	(11		)	(2,347		)
Charge-offs	(176		)	(7		)	(64		)	(5		)	—			—			(252		)
Ending Balance	$	4,133		$	3,365		$	685		$	1,223		$	8,106		$	4		$	17,516



	As of December 31, 2010
	Crops		Permanent Plantings		Livestock		Part-time Farm		AgStorage and Processing (including ethanol facilities)		Other		Total
	(in thousands)
Ending Balance
Evaluated collectively for impairment	$	1,699,477	$	835,254	$	1,130,466	$	282,400	$	239,933	$	22,514	$	4,210,044
Evaluated individually for impairment	31,903		30,221		15,992		8,745		6,790		425		94,076
	$	1,731,380	$	865,475	$	1,146,458	$	291,145	$	246,723	$	22,939	$	4,304,120
Allowance for Losses
Evaluated collectively for impairment	$	1,499	$	783	$	2,236	$	222	$	7,947	$	13	$	12,700
Evaluated individually for impairment	2,073		2,754		513		223		1,850		2		7,415
	$	3,572	$	3,537	$	2,749	$	445	$	9,797	$	15	$	20,115

Farmer Mac recognized interest income of approximately $2.5 million, $2.1 million and $2.6 million on impaired loans during the years ended December 31, 2011, 2010 and 2009, respectively. During 2011, 2010 and 2009, Farmer Mac's average investment in impaired loans was $90.4 million, $105.8 million and $140.5 million, respectively.

The following tables present by commodity type the unpaid principal balances, recorded investment and specific allowance for losses related to impaired loans and the recorded investment in loans on nonaccrual status as of December 31, 2011 and 2010 and the average recorded investment and interest income recognized on impaired loans for the year ended December 31, 2011:



	As of December 31, 2011
	Crops		Permanent Plantings		Livestock		Part-time Farm		AgStorage and Processing (including ethanol facilities)		Other		Total
	(in thousands)
Impaired Loans:
With no specific allowance:
Recorded investment	$	6,809	$	10,083	$	3,248	$	3,241	$	—	$	914	$	24,295
Unpaid principal balance	7,446		9,957		4,088		3,298		—		902		25,691
With a specific allowance:
Recorded investment	23,009		18,668		7,036		9,392		5,842		121		64,068
Unpaid principal balance	22,074		18,288		6,796		9,215		5,842		120		62,335
Associated allowance	2,410		2,075		513		448		1,850		—		7,296
Total:
Recorded investment	29,818		28,751		10,284		12,633		5,842		1,035		88,363
Unpaid principal balance	29,520		28,245		10,884		12,513		5,842		1,022		88,026
Associated allowance	2,410		2,075		513		448		1,850		—		7,296
For the Year Ended:
Average recorded investment in impaired loans	$	30,400	$	29,806	$	12,732	$	10,329	$	6,319	$	824	$	90,410
Income recognized on impaired loans	549		1,009		426		185		377		—		2,546
Recorded Investment of Loans on Nonaccrual Status:	$	9,214	$	25,710	$	3,483	$	6,931	$	—	$	—	$	45,338



	As of December 31, 2010
	Crops		Permanent Plantings		Livestock		Part-time Farm		AgStorage and Processing (including ethanol facilities)		Other		Total
	(in thousands)
Impaired Loans:
With no specific allowance:
Recorded investment	$	16,015	$	10,549	$	6,873	$	1,050	$	—	$	—	$	34,487
Unpaid principal balance	17,274		10,895		7,087		1,072		—		—		36,328
With a specific allowance:
Recorded investment	15,414		18,949		9,052		7,788		6,839		430		58,472
Unpaid principal balance	14,630		19,326		8,905		7,672		6,790		425		57,748
Associated allowance	2,073		2,754		513		223		1,850		2		7,415
Total:
Recorded investment	31,429		29,498		15,925		8,838		6,839		430		92,959
Unpaid principal balance	31,904		30,221		15,992		8,744		6,790		425		94,076
Associated allowance	2,073		2,754		513		223		1,850		2		7,415
Recorded Investment of Loans on Nonaccrual Status:	$	13,828	$	8,793	$	3,267	$	4,380	$	8,796	$	—	$	39,064

In accordance with the terms of all applicable trust agreements, Farmer Mac generally acquires all loans that collateralize Farmer Mac Guaranteed Securities that become and remain either 90 or 120 days (depending on the provisions of the applicable agreement) or more past due on the next subsequent loan payment date. In accordance with the terms of all LTSPCs, Farmer Mac acquires loans that are either 90 days or 120 days (depending on the provisions of the applicable agreement) delinquent upon the request of the counterparty.

During 2011, Farmer Mac purchased 20 defaulted loans having an unpaid principal balance of $21.7 million from pools underlying Farmer Mac I Guaranteed Securities and LTSPCs. During 2010, Farmer Mac purchased 22 defaulted loans having an unpaid principal balance of $6.1 million from pools underlying Farmer Mac I Guaranteed Securities and LTSPCs. The following table presents Farmer Mac's purchases of defaulted loans underlying Farmer Mac I Guaranteed Securities and LTSPCs:



	For the Year Ended December 31,
	2011		2010		2009
	(in thousands)
Defaulted loans purchased underlying off-balance sheet Farmer Mac I Guaranteed Securities	$	7,471	$	3,456	$	1,157
Defaulted loans underlying on-balance sheet Farmer Mac I Guaranteed Securities	—		—		2,216
Defaulted loans purchased underlying LTSPCs	14,192		2,626		17,896
Total	$	21,663	$	6,082	$	21,269

Credit Quality Indicators

The following tables present credit quality indicators related to loans held and loans underlying LTSPCs and Farmer Mac I Guaranteed Securities (excluding AgVantage securities) as of December 31, 2011 and 2010 . Farmer Mac uses 90-day delinquency information to evaluate its credit risk exposure on these program assets because historically it has been the best measure of borrower credit quality deterioration. Most of the loans held and underlying LTSPCs and Farmer Mac I Guaranteed Securities have annual (January 1) or semi-annual (January 1 and July 1) payment dates and are supported by less frequent and less predictable revenue sources, such as the cash flows generated from the maturation of crops, sales of livestock and government farm support programs. Taking into account the reduced frequency of payment due dates and revenue sources, Farmer Mac considers the 90-day delinquency point to be the most significant observation point when evaluating its credit risk exposure.



	As of December 31, 2011
	Crops		Permanent Plantings		Livestock		Part-time Farm		AgStorage and Processing (including ethanol facilities)		Other		Total
	(in thousands)
Credit risk profile by internally assigned grade (1)
Grade:
Acceptable	$	1,769,768	$	748,558	$	1,097,184	$	215,525	$	96,532	$	15,158	$	3,942,725
Other assets especially mentioned ("OAEM") (2)	60,076		20,442		74,959		7,103		45,673		641		208,894
Substandard (2)	35,115		55,345		51,968		22,492		31,487		1,137		197,544
Total	$	1,864,959	$	824,345	$	1,224,111	$	245,120	$	173,692	$	16,936	$	4,349,163

Commodity analysis of past due loans (1)
Greater than 90 days	$	11,605	$	19,228	$	2,475	$	7,315	$	—	$	—	$	40,623
In bankruptcy and REO	7,132		4,799		2,987		1,150		—		—		16,068
Total non-performing	$	18,737	$	24,027	$	5,462	$	8,465	$	—	$	—	$	56,691


(1)	Amounts represent unpaid principal balance of risk-rated loans, which is the basis Farmer Mac uses to analyze its portfolio, and recorded investment of past due loans. Amounts include real estate owned, at lower of cost or fair value less estimated selling costs, of $3.1 million.


(2)	Assets in the OAEM category generally have potential weaknesses due to performance issues but are currently considered to be adequately secured. Substandard assets have a well-defined weakness or weaknesses and there is a distinct possibility that some loss will be sustained if deficiencies are not corrected.



	As of December 31, 2010
	Crops		Permanent Plantings		Livestock		Part-time Farm		AgStorage and Processing (including ethanol facilities)		Other		Total
	(in thousands)
Credit risk profile by internally assigned grade (1)
Grade:
Acceptable	$	1,625,995	$	792,061	$	993,542	$	268,111	$	116,248	$	20,321	$	3,816,278
Other assets especially mentioned ("OAEM") (2)	59,768		17,112		86,500		9,652		76,947		639		250,618
Substandard (2)	45,617		56,302		66,416		13,382		53,528		1,979		237,224
Total	$	1,731,380	$	865,475	$	1,146,458	$	291,145	$	246,723	$	22,939	$	4,304,120

Commodity analysis of past due loans (1)
Greater than 90 days	$	21,423	$	26,312	$	7,177	$	3,803	$	10,892	$	641	$	70,248
In bankruptcy and REO	4,886		3,712		1,395		1,537		—		—		11,530
Total non-performing	$	26,309	$	30,024	$	8,572	$	5,340	$	10,892	$	641	$	81,778


(1)	Amounts represent unpaid principal balance of risk-rated loans, which is the basis Farmer Mac uses to analyze its portfolio, and recorded investment of past due loans. Amounts include real estate owned, at lower of cost or fair value less estimated selling costs, of $2.0 million.


(2)	Assets in the OAEM category generally have potential weaknesses due to performance issues but are currently considered to be adequately secured. Substandard assets have a well-defined weakness or weaknesses and there is a distinct possibility that some loss will be sustained if deficiencies are not corrected.

Concentrations of Credit Risk

The following table sets forth the geographic and commodity/collateral diversification, as well as the range of original loan-to-value ratios, for all loans held and loans underlying Farmer Mac I Guaranteed Securities (excluding AgVantage securities) and LTSPCs as of December 31, 2011 and 2010:



	As of December 31,
	2011		2010
	(in thousands)
By commodity/collateral type:
Crops	$	1,864,959	$	1,731,380
Permanent plantings	824,345		865,475
Livestock	1,224,111		1,146,458
Part-time farm	245,120		291,145
AgStorage and processing (including ethanol facilities)	173,692		246,723
Other	16,936		22,939
Total	$	4,349,163	$	4,304,120
By geographic region (1):
Northwest	$	761,078	$	660,845
Southwest	1,597,369		1,626,398
Mid-North	857,659		934,879
Mid-South	484,176		521,294
Northeast	294,854		317,715
Southeast	354,027		242,989
Total	$	4,349,163	$	4,304,120
By original loan-to-value ratio:
0.00% to 40.00%	$	1,104,617	$	1,030,580
40.01% to 50.00%	769,618		770,744
50.01% to 60.00%	1,225,939		1,246,675
60.01% to 70.00%	1,062,061		1,056,132
70.01% to 80.00%	135,985		155,363
80.01% to 90.00%	50,943		44,626
Total	$	4,349,163	$	4,304,120


(1)	Geographic regions: Northwest (AK, ID, MT, ND, NE, OR, SD, WA, WY); Southwest (AZ, CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, MO, WI); Mid-South (KS, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NC, NH, NJ, NY, OH, PA, RI, TN, VA, VT, WV); Southeast (AL, AR, FL, GA, LA, MS, SC).

The original loan-to-value ratio is calculated by dividing the loan principal balance at the time of guarantee, purchase or commitment by the appraised value at the date of loan origination or, when available, the updated appraised value at the time of guarantee, purchase or commitment. Current loan-to-value ratios may be higher or lower than the original loan-to-value ratios.