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 September 30, 2012 and December 31, 2011, Farmer Mac recorded specific allowances for losses of $8.0 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 September 30, 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 and nine months ended September 30, 2012 and 2011:



	September 30, 2012									September 30, 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)
For the Three Months Ended:
Beginning Balance	$	9,361		$	8,779		$	18,140		$	11,053		$	7,443		$	18,496
Provision for/(release of) losses	137			(43		)	94			(349		)	(452		)	(801		)
Charge-offs	(448		)	—			(448		)	(5		)	—			(5		)
Ending Balance	$	9,050		$	8,736		$	17,786		$	10,699		$	6,991		$	17,690

For the Nine Months Ended:
Beginning Balance	$	10,161		$	7,355		$	17,516		$	9,803		$	10,312		$	20,115
(Release of)/provision for losses	(663		)	1,381			718			1,092			(3,321		)	(2,229		)
Charge-offs	(448		)	—			(448		)	(196		)	—			(196		)
Ending Balance	$	9,050		$	8,736		$	17,786		$	10,699		$	6,991		$	17,690

During third quarter 2012, Farmer Mac recorded provisions to its allowance for loan losses of $0.1 million, releases from its reserve for losses of $43,000, and charged off $0.4 million of losses upon acquisition of real estate owned ("REO") or upon loan liquidation. For the nine months ended September 30, 2012, Farmer Mac recorded releases from its allowance for loan losses of $0.7 million, provisions to its reserve for losses of $1.4 million and charged off $0.4 million of losses. The releases recorded for the nine months ended September 30, 2012 were driven primarily by reductions in specific allowances for certain loans due to principal payments received and updated appraisal information and the reclassification of approximately $0.3 million from the allowance for loan losses to the reserve for losses due to the deconsolidation of certain VIEs resulting from a change in related party status. The provision for losses recorded for the nine months ended September 30, 2012 primarily resulted from an increase in a specific allowance related to an ethanol loan underlying an LTSPC.

During third quarter 2011, Farmer Mac recorded releases from its allowance for loan losses and its reserve for losses of $0.3 million and $0.5 million, respectively, and charged off $5,000 of losses. The releases from the allowance for losses in third quarter 2011 were primarily due to a decline in estimated probable losses related to Farmer Mac's exposure to the dairy industry. For the nine months ended September 30, 2011, Farmer Mac recorded provisions to its allowance for loan losses of $1.1 million, releases from its reserve for losses of $3.3 million, and charged off $0.2 million of losses. 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 (release of)/provision for losses for the first nine months of 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.

The following tables present the changes in the allowance for losses for the three and nine months ended September 30, 2012 and 2011 by commodity type:



	September 30, 2012
	Crops			Permanent Plantings			Livestock			Part-time Farm			Ag. Storage and Processing (including ethanol facilities)		Other			Total
	(in thousands)
For the Three Months Ended:
Beginning Balance	$	4,281		$	2,522		$	1,471		$	557		$	9,302	$	7		$	18,140
(Release of)/provision for losses	(305		)	176			(129		)	192			161		(1		)	94
Charge-offs	—			(375		)	—			(73		)	—		—			(448		)
Ending Balance	$	3,976		$	2,323		$	1,342		$	676		$	9,463	$	6		$	17,786

For the Nine Months Ended:
Beginning Balance	$	4,133		$	3,099		$	1,697		$	477		$	8,106	$	4		$	17,516
(Release of)/provision for losses	(157		)	(401		)	(355		)	272			1,357		2			718
Charge-offs	—			(375		)	—			(73		)	—		—			(448		)
Ending Balance	$	3,976		$	2,323		$	1,342		$	676		$	9,463	$	6		$	17,786



	September 30, 2011
	Crops			Permanent Plantings			Livestock			Part-time Farm			Ag. Storage and Processing (including ethanol facilities)			Other			Total
	(in thousands)
For the Three Months Ended:
Beginning Balance	$	3,715		$	3,582		$	2,688		$	402		$	8,100		$	9		$	18,496
Provision for/(release of) losses	144			(27		)	(891		)	(28		)	2			(1		)	(801		)
Charge-offs	—			—			—			(5		)	—			—			(5		)
Ending Balance	$	3,859		$	3,555		$	1,797		$	369		$	8,102		$	8		$	17,690

For the Nine Months Ended:
Beginning Balance	$	3,572		$	3,537		$	2,749		$	445		$	9,797		$	15		$	20,115
Provision for/(release of) losses	463			25			(944		)	(71		)	(1,695		)	(7		)	(2,229		)
Charge-offs	(176		)	(7		)	(8		)	(5		)	—			—			(196		)
Ending Balance	$	3,859		$	3,555		$	1,797		$	369		$	8,102		$	8		$	17,690

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 September 30, 2012 and December 31, 2011:



	As of September 30, 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	$	1,925,509	$	795,516	$	1,169,443	$	198,175	$	193,769	$	12,041	$	4,294,453
Evaluated individually for impairment	31,786		37,939		17,034		16,391		4,337		1,017		108,504
	$	1,957,295	$	833,455	$	1,186,477	$	214,566	$	198,106	$	13,058	$	4,402,957
Allowance for Losses
Evaluated collectively for impairment	$	1,626	$	643	$	1,131	$	107	$	6,263	$	5	$	9,775
Evaluated individually for impairment	2,350		1,680		211		569		3,200		1		8,011
	$	3,976	$	2,323	$	1,342	$	676	$	9,463	$	6	$	17,786



	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	$	775	$	1,290	$	172	$	6,256	$	4	$	10,220
Evaluated individually for impairment	2,410		2,324		407		305		1,850		—		7,296
	$	4,133	$	3,099	$	1,697	$	477	$	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 September 30, 2012 and December 31, 2011:



	As of September 30, 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	$	7,863	$	10,060	$	6,007	$	3,377	$	—	$	907	$	28,214
Unpaid principal balance	7,752		10,038		5,686		3,323		—		902		27,701
With a specific allowance:
Recorded investment	24,905		28,302		11,529		13,156		4,498		117		82,507
Unpaid principal balance	24,034		27,901		11,348		13,068		4,337		115		80,803
Associated allowance	2,350		1,680		211		569		3,200		1		8,011
Total:
Recorded investment	32,768		38,362		17,536		16,533		4,498		1,024		110,721
Unpaid principal balance	31,786		37,939		17,034		16,391		4,337		1,017		108,504
Associated allowance	2,350		1,680		211		569		3,200		1		8,011

Recorded investment of loans on nonaccrual status:	$	13,533	$	22,601	$	5,219	$	8,420	$	—	$	—	$	49,773



	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		2,324		407		305		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		2,324		407		305		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 and nine months ended September 30, 2012 and 2011:



	September 30, 2012
	Crops		Permanent Plantings		Livestock		Part-time Farm		Ag. Storage and Processing (including ethanol facilities)		Other		Total
	(in thousands)
For the Three Months Ended:
Average recorded investment in impaired loans	$	31,490	$	34,566	$	17,643	$	16,526	$	4,449	$	1,033	$	105,707
Income recognized on impaired loans	72		1,015		94		76		—		—		1,257

For the Nine Months Ended:
Average recorded investment in impaired loans	29,583		34,284		14,973		16,127		4,785		1,035		100,787
Income recognized on impaired loans	213		1,691		210		250		—		—		2,364



	September 30, 2011
	Crops		Permanent Plantings		Livestock		Part-time Farm		Ag. Storage and Processing (including ethanol facilities)		Other		Total
	(in thousands)
For the Three Months Ended:
Average recorded investment in impaired loans	$	31,639	$	31,299	$	12,371	$	11,511	$	6,158	$	1,207	$	94,185
Income recognized on impaired loans	120		480		42		63		—		—		705

For the Nine Months Ended:
Average recorded investment in impaired loans	30,546		30,070		13,344		9,753		6,439		771		90,923
Income recognized on impaired loans	432		857		343		125		382		—		2,139

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). 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. 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. 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 the three and nine months ended September 30, 2012, Farmer Mac purchased 7 defaulted loans having an unpaid principal balance of $7.2 million and 12 defaulted loans having an unpaid principal balance of $11.0 million, respectively, from pools underlying Farmer Mac I Guaranteed Securities and LTSPCs. During the three and nine months ended September 30, 2011, Farmer Mac purchased 5 defaulted loans having an unpaid principal balance of $2.9 million and 18 defaulted loans having an unpaid principal balance of $21.3 million, respectively, 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 and nine months ended September 30, 2012 and 2011 and the outstanding balances and carrying amounts of all such loans as of September 30, 2012 and December 31, 2011:



	For the Three Months Ended				For the Nine Months Ended
	September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
	(in thousands)
Unpaid principal balance at acquisition date:
Loans underlying LTSPCs	$	432	$	—	$	2,962	$	13,974
Loans underlying Farmer Mac Guaranteed Securities	6,742		2,921		8,069		7,292
Total unpaid principal balance at acquisition date	7,174		2,921		11,031		21,266
Contractually required payments receivable	7,373		2,922		11,230		21,314
Impairment recognized subsequent to acquisition	367		42		382		3,812
Recovery/release of allowance for defaulted loans	46		5		979		19



	September 30, 2012		December 31, 2011
	(in thousands)
Outstanding balance	$	40,715	$	35,773
Carrying amount	35,046		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 September 30, 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 September 30, 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 September 30, 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 September 30, 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 Nine Months Ended
	September 30, 2012		December 31, 2011		September 30, 2011		September 30, 2012		September 30, 2011
	(in thousands)
On-balance sheet assets:
Farmer Mac I:
Loans	$	29,120	$	33,243	$	35,860	$	199	$	334
Total on-balance sheet	$	29,120	$	33,243	$	35,860	$	199	$	334
Off-balance sheet assets:
Farmer Mac I:
LTSPCs	$	11,677	$	7,379	$	8,988	$	—	$	—
Total off-balance sheet	$	11,677	$	7,379	$	8,988	$	—	$	—
Total	$	40,797	$	40,622	$	44,848	$	199	$	334


(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 $29.1 million, $33.2 million and $35.9 million of on-balance sheet loans reported as 90 days delinquent as of September 30, 2012, December 31, 2011 and September 30, 2011, respectively, $2.6 million, $5.6 million and $6.2 million, respectively, are loans subject to "removal-of-account" provisions.

Credit Quality Indicators

Farmer Mac analyzes credit risk related to loans held and loans underlying LTSPCs and Farmer Mac I Guaranteed Securities (excluding AgVantage securities) based on internally assigned loan scores (i.e., risk ratings) that are derived by taking into consideration such factors as historical repayment performance, indicators of current financial condition, loan seasoning, loan size and loan-to-value ratio. Loans are then classified into one of the following asset categories based on their underlying risk rating: acceptable; other assets especially mentioned; and substandard. Farmer Mac believes this analysis provides meaningful information regarding the credit risk profile of its Farmer Mac I portfolio as of each quarterly reporting period end date.

Farmer Mac also 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 delinquency information.

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 September 30, 2012 and December 31, 2011.



	As of September 30, 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	$	1,881,406	$	764,097	$	1,084,277	$	188,445	$	130,902	$	11,319	$	4,060,446
Other assets especially mentioned ("OAEM") (2)	34,118		16,025		45,158		6,241		44,754		599		146,895
Substandard (2)	41,771		53,333		57,042		19,880		22,450		1,140		195,616
Total	$	1,957,295	$	833,455	$	1,186,477	$	214,566	$	198,106	$	13,058	$	4,402,957

Commodity analysis of past due loans (1)
90 days or more past due	$	13,414	$	11,861	$	4,899	$	6,125	$	4,498	$	—	$	40,797


(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	$	19,227	$	2,475	$	7,315	$	—	$	—	$	40,622


(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 September 30, 2012 and December 31, 2011:



	September 30, 2012		December 31, 2011
	(in thousands)
By commodity/collateral type:
Crops	$	1,957,295	$	1,864,959
Permanent plantings	833,455		824,345
Livestock	1,186,477		1,224,111
Part-time farm	214,566		245,120
Ag. Storage and processing (including ethanol facilities)	198,106		173,692
Other	13,058		16,936
Total	$	4,402,957	$	4,349,163
By geographic region (1):
Northwest	$	785,454	$	761,078
Southwest	1,555,368		1,597,369
Mid-North	897,453		857,659
Mid-South	512,628		484,176
Northeast	273,420		294,854
Southeast	378,634		354,027
Total	$	4,402,957	$	4,349,163
By original loan-to-value ratio:
0.00% to 40.00%	$	1,119,814	$	1,104,617
40.01% to 50.00%	802,204		769,618
50.01% to 60.00%	1,216,706		1,225,939
60.01% to 70.00%	1,097,884		1,062,061
70.01% to 80.00%	126,297		135,985
80.01% to 90.00%	40,052		50,943
Total	$	4,402,957	$	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.