
5.	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 March 31, 2012 and December 31, 2011 Farmer Mac recorded specific allowances for losses of $7.7 million and $7.3 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 March 31, 2012 or December 31, 2011. See Note 2(b), Note 3 and Note 6 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


•	a "Reserve for losses" on loans underlying LTSPCs and Farmer Mac Guaranteed Securities.

The following is a summary of the changes in the allowance for losses for the three months ended March 31, 2012 and 2011:



	For the Three Months Ended
	March 31, 2012						March 31, 2011
	Allowance for Loan Losses		Reserve for Losses		Total Allowance for Losses		Allowance for Loan Losses		Reserve for Losses			Total Allowance for Losses
	(in thousands)
Beginning Balance	$	10,161	$	7,355	$	17,516	$	9,803	$	10,312		$	20,115
Provision for/(release of) losses	420		30		450		1,281		(1,934		)	(653		)
Charge-offs	—		—		—		—		—			—
Ending Balance	$	10,581	$	7,385	$	17,966	$	11,084	$	8,378		$	19,462

During first quarter 2012, Farmer Mac recorded provisions to its allowance for loan losses of $0.4 million and provisions to its reserve for losses of $30,000. During first quarter 2011, Farmer Mac recorded provisions to its allowance for loan losses of $1.3 million and a release from its reserve for losses of $1.9 million. In first quarter 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 first quarter 2011 reflects this reclassification as well as a decline in estimated probable losses related to Farmer Mac's exposure to the ethanol and dairy industries. Farmer Mac recorded no charge-offs or recoveries to its allowance for losses during first quarter 2012 and 2011.

The following tables present the changes in the allowance for losses for the three months ended March 31, 2012 and 2011 by commodity type:



	For the Three Months Ended March 31, 2012
	Crops		Permanent Plantings		Livestock			Part-time Farm		Ag. Storage and Processing (including ethanol facilities)			Other		Total
	(in thousands)
Beginning Balance	$	4,133	$	3,365	$	685		$	1,223	$	8,106		$	4	$	17,516
Provision for/(release of) losses	133		117		(49		)	252		(6		)	3		450
Charge-offs	—		—		—			—		—			—		—
Ending Balance	$	4,266	$	3,482	$	636		$	1,475	$	8,100		$	7	$	17,966



	For the Three Months Ended March 31, 2011
	Crops		Permanent Plantings		Livestock			Part-time Farm		Ag. Storage and Processing (including ethanol facilities)			Other			Total
	(in thousands)
Beginning Balance	$	3,572	$	3,537	$	2,749		$	445	$	9,797		$	15		$	20,115
Provision for/(release of) losses	350		265		(899		)	608		(974		)	(3		)	(653		)
Charge-offs	—		—		—			—		—			—			—
Ending Balance	$	3,922	$	3,802	$	1,850		$	1,053	$	8,823		$	12		$	19,462

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 March 31, 2012 and December 31, 2011:



	As of March 31, 2012
	Crops		Permanent Plantings		Livestock		Part-time Farm		Ag. Storage and Processing (including ethanol facilities)		Other		Total
	(in thousands)
Ending Balance
Evaluated collectively for impairment	$	1,864,042	$	775,932	$	1,236,691	$	218,170	$	162,889	$	14,045	$	4,271,769
Evaluated individually for impairment	24,580		38,161		14,068		18,485		4,400		1,020		100,714
	$	1,888,622	$	814,093	$	1,250,759	$	236,655	$	167,289	$	15,065	$	4,372,483
Allowance for Losses
Evaluated collectively for impairment	$	1,817	$	1,309	$	137	$	745	$	6,250	$	7	$	10,265
Evaluated individually for impairment	2,449		2,173		499		730		1,850		—		7,701
	$	4,266	$	3,482	$	636	$	1,475	$	8,100	$	7	$	17,966



	As of December 31, 2011
	Crops		Permanent Plantings		Livestock		Part-time Farm		Ag. Storage 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

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 March 31, 2012 and December 31, 2011:



	As of March 31, 2012
	Crops		Permanent Plantings		Livestock		Part-time Farm		Ag. Storage and Processing (including ethanol facilities)		Other		Total
	(in thousands)
Impaired Loans:
With no specific allowance:
Recorded investment	$	2,415	$	10,525	$	2,155	$	2,769	$	—	$	920	$	18,784
Unpaid principal balance	2,341		10,294		2,149		2,769		—		902		18,455
With a specific allowance:
Recorded investment	23,119		28,729		12,166		16,055		4,400		119		84,588
Unpaid principal balance	22,239		27,867		11,919		15,716		4,400		118		82,259
Associated allowance	2,449		2,173		499		730		1,850		—		7,701
Total:
Recorded investment	25,534		39,254		14,321		18,824		4,400		1,039		103,372
Unpaid principal balance	24,580		38,161		14,068		18,485		4,400		1,020		100,714
Associated allowance	2,449		2,173		499		730		1,850		—		7,701

Recorded Investment of Loans on Nonaccrual Status:	$	9,089	$	25,321	$	3,132	$	7,633	$	—	$	—	$	45,175



	As of December 31, 2011
	Crops		Permanent Plantings		Livestock		Part-time Farm		Ag. Storage 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

Recorded Investment of Loans on Nonaccrual Status:	$	9,214	$	25,710	$	3,483	$	6,931	$	—	$	—	$	45,338

The following table presents by commodity type the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2012 and 2011:



	Crops		Permanent Plantings		Livestock		Part-time Farm		Ag. Storage and Processing (including ethanol facilities)		Other		Total
	(in thousands)
For the Three Months Ended March 31, 2012:
Average recorded investment in impaired loans	$	27,676	$	34,003	$	12,303	$	15,729	$	5,121	$	1,037	$	95,869
Income recognized on impaired loans	87		280		62		104		—		—		533

For the Three Months Ended March 31, 2011:
Average recorded investment in impaired loans	29,452		28,841		14,318		7,995		6,720		336		87,662
Income recognized on impaired loans	156		27		217		41		382		—		823

When particular criteria are met, such as the default of the borrower, Farmer Mac becomes entitled to purchase the defaulted loans underlying Farmer Mac Guaranteed Securities (commonly referred to as "removal-of-account" provisions). 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. Farmer Mac records all such defaulted loans at their unpaid principal balance during the period in which Farmer Mac becomes entitled to purchase the loans and therefore regains effective control over the transferred loans. Subsequent to the purchase, such defaulted loans are treated as nonaccrual loans and, therefore, interest is accounted for on the cash basis. Any decreases in expected cash flows are recognized as impairment.

During first quarter 2012, Farmer Mac purchased 1 defaulted loan having an unpaid principal balance of $0.7 million from a pool underlying Farmer Mac I Guaranteed Securities. During first quarter 2011, Farmer Mac purchased 8 defaulted loans having an unpaid principal balance of $16.9 million from pools underlying Farmer Mac I Guaranteed Securities and LTSPCs. The following tables present information related to Farmer Mac's acquisition of defaulted loans for the three months ended March 31, 2012 and 2011 and the outstanding balances and carrying amounts of all such loans as of March 31, 2012 and December 31, 2011:



	For the Three Months Ended
	March 31, 2012		March 31, 2011
	(in thousands)
Unpaid principal balance at acquisition date:
Loans underlying LTSPCs	$	—	$	15,556
Loans underlying Farmer Mac Guaranteed Securities	729		1,369
Total unpaid principal balance at acquisition date	729		16,925

Contractually required payments receivable	732		16,971
Impairment recognized subsequent to acquisition	15		3,770
Recovery/release of allowance for defaulted loans	40		10



	March 31, 2012		December 31, 2011
	(in thousands)
Outstanding balance	$	36,464	$	35,773
Carrying amount	29,954		29,461

Net credit losses and 90-day delinquencies as of and for the periods indicated for loans held and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs are presented in the table below. Information is not presented for loans underlying AgVantage securities, USDA Guaranteed Securities, Farmer Mac II Guaranteed Securities, or rural utilities loans or underlying Farmer Mac Guaranteed Securities – Rural Utilities. Each AgVantage security is a general obligation of an issuing institution approved by Farmer Mac and is secured by eligible loans in an amount at least equal to the outstanding principal amount of the security. Farmer Mac excludes the loans that secure AgVantage securities from the credit risk metrics it discloses because of the credit quality of the issuing institutions, the collateralization level for the securities, and because delinquent loans are required to be removed from the pool of pledged loans and replaced with current eligible loans. As of March 31, 2012, there were no probable losses inherent in Farmer Mac's AgVantage securities due to the credit quality of the obligors, as well as the underlying collateral. To date, Farmer Mac has not experienced any credit losses on any Farmer Mac I AgVantage securities. The USDA-guaranteed portions presented as USDA Guaranteed Securities, as well as those that collateralize Farmer Mac II Guaranteed Securities, are guaranteed by the USDA. Each USDA guarantee is an obligation backed by the full faith and credit of the United States. As of March 31, 2012, neither Farmer Mac nor Farmer Mac II LLC had experienced any credit losses on any USDA Guaranteed Securities or Farmer Mac II Guaranteed Securities. As of March 31, 2012, there were no delinquencies and no probable losses inherent in the Farmer Mac's rural utilities loans held or in any Farmer Mac Guaranteed Securities – Rural Utilities. As of March 31, 2012, Farmer Mac has not experienced any credit losses on any of those loans or securities.



	90-Day Delinquencies (1)						Net Credit Losses
	As of						For the Three Months Ended
	March 31, 2012		December 31, 2011		March 31, 2011		March 31, 2012		March 31, 2011
	(in thousands)
On-balance sheet assets:
Farmer Mac I:
Loans	$	38,122	$	33,243	$	36,522	$	—	$	274
Total on-balance sheet	$	38,122	$	33,243	$	36,522	$	—	$	274
Off-balance sheet assets:
Farmer Mac I:
LTSPCs	$	14,997	$	7,379	$	20,802	$	—	$	—
Total off-balance sheet	$	14,997	$	7,379	$	20,802	$	—	$	—
Total	$	53,119	$	40,622	$	57,324	$	—	$	274


(1)	Includes loans and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs that are 90 days or more past due, in foreclosure, restructured after delinquency, and in bankruptcy, excluding loans performing under either their original loan terms or a court-approved bankruptcy plan.

Of the $38.1 million, $33.2 million and $36.5 million of on-balance sheet loans reported as 90 days delinquent as of March 31, 2012, December 31, 2011 and March 31, 2011, respectively, $8.1 million, $5.6 million and $8.5 million, respectively, are loans subject to "removal-of-account" provisions.

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 March 31, 2012 and December 31, 2011. 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 March 31, 2012
	Crops		Permanent Plantings		Livestock		Part-time Farm		Ag. Storage and Processing (including ethanol facilities)		Other		Total
	(in thousands)
Credit risk profile by internally assigned grade (1)
Grade:
Acceptable	$	1,808,452	$	735,777	$	1,143,439	$	207,426	$	117,062	$	13,283	$	4,025,439
Other assets especially mentioned ("OAEM") (2)	49,174		16,435		56,282		6,899		28,465		648		157,903
Substandard (2)	30,996		61,881		51,038		22,330		21,762		1,134		189,141
Total	$	1,888,622	$	814,093	$	1,250,759	$	236,655	$	167,289	$	15,065	$	4,372,483

Commodity analysis of past due loans (1)
90 days or more past due	$	10,813	$	23,700	$	6,213	$	12,393	$	—	$	—	$	53,119


(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.


(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, 2011
	Crops		Permanent Plantings		Livestock		Part-time Farm		Ag. Storage 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)
90 days or more past due	$	11,605	$	19,228	$	2,475	$	7,315	$	—	$	—	$	40,623


(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.


(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 March 31, 2012 and December 31, 2011:



	March 31, 2012		December 31, 2011
	(in thousands)
By commodity/collateral type:
Crops	$	1,888,622	$	1,864,959
Permanent plantings	814,093		824,345
Livestock	1,250,759		1,224,111
Part-time farm	236,655		245,120
Ag. Storage and processing (including ethanol facilities)	167,289		173,692
Other	15,065		16,936
Total	$	4,372,483	$	4,349,163
By geographic region (1):
Northwest	$	744,481	$	761,078
Southwest	1,570,758		1,597,369
Mid-North	845,210		857,659
Mid-South	534,027		484,176
Northeast	287,678		294,854
Southeast	390,329		354,027
Total	$	4,372,483	$	4,349,163
By original loan-to-value ratio:
0.00% to 40.00%	$	1,103,623	$	1,104,617
40.01% to 50.00%	769,123		769,618
50.01% to 60.00%	1,231,669		1,225,939
60.01% to 70.00%	1,090,556		1,062,061
70.01% to 80.00%	131,549		135,985
80.01% to 90.00%	45,963		50,943
Total	$	4,372,483	$	4,349,163


(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.