2011 Annual Report

Farm Credit

Opening doors for 95 years

Made for you. Owned by you. Here for you. | 2011 Annual Report

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homeowners—and, given the challenges of both farming

and banking in those nine and a half decades, I would

say that’

accomplishment in its own right. A quick history lesson:

The seeds for the Farm Credit System were planted in

1908 by President Theodore Roosevelt, who appointed a

Country Life Commission to address the problems facing

the rural population of the country

adequate credit for agriculture. That report led to various

presidential and congressional studies, which included an

extensive analysis of rural credit.

Opening doors for the futureMidAtlantic Farm Credit has distributed

almost $150,000 in scholarships to area

students since 2001.

These scholarships have allowed

students to open the doors of higher

education. In some cases, our awards have

meant the difference between attending

school and postponing it, or not being able

to participate at all.

Our past scholarship winners have

become farmers, veterinarians, teachers,

engineers, and—in at least one case—loan

officers.

We’re proud of the students who have

won scholarships over the years, and we’re

happy to have been even a small part of

helping to open the door to their future.

President’s Message 1-5Report of Management 6Report on Internal Control Over Financial Reporting 7Consolidated Five-Year Summary of Selected Financial Data 8Management’s Discussion and Analysis of Financial Condition and Results of Operations 9-21Disclosure Required by Farm Credit Administration Regulations 22-27Report of the Audit Committee 28Report of Independent Certified Public Accountants 29Consolidated Financial Statements 30-33Notes to the Consolidated Financial Statements 34-56Board of Directors and Management Team 56-57

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2011 winners (left to right, from top):

Jacqueline Binkley, Shelby Hurley, Carissa Doody, Mark Holloway, Samantha Martz,

Denise Beam, Earl Gwin III, Samantha Garst, Ashley Caroff, Lauren Williams,

Laura Claire Vogler, and Julie Schmidt.

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Bob Frazee, CEO

Opening doors for 95 yearsIn 2011, Farm Credit celebrated its 95th anniversary.

That’s almost a century of helping farmers and rural

homeowners—and, given the challenges of both farming

and banking in those nine and a half decades, I would

say that’s quite an accomplishment!

Establishing Farm Credit in 1916 was quite an

accomplishment in its own right. A quick history lesson:

The seeds for the Farm Credit System were planted in

1908 by President Theodore Roosevelt, who appointed a

Country Life Commission to address the problems facing

the rural population of the country.

The Commission’s report documented a lack of

adequate credit for agriculture. That report led to various

presidential and congressional studies, which included an

extensive analysis of rural credit.

After that analysis, there was a divisive

Congressional debate over how to provide credit to

American farmers, which led to 100 separate bills being

introduced. Congress battled over the respective bills,

eventually coming to a stalemate in 1914. In 1915, a

Joint Committee on Rural Credit was created, and that

group then drafted the final compromise adopted in

1916 that established the Farm Credit System.

Ninety-five years later, does any of that sound

familiar?

Congress may still be at a stalemate, but the

good news is that the mission of providing credit to

agriculture ninety-five years ago is burning strong in

your financial cooperative today. We are committed

to opening doors of opportunity for the farmers and

rural homeowners in our territory.

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Keeping the doors openFrankly, the last several years have been

challenging, both for ag producers in our territory

and for the financial services industry. A recession

that started in December 2007, a sluggish economy

in the ensuing years, domestic and international

credit concerns, big fluctuations in commodities

as well as in inputs…these factors have all combined

to make for some interesting times.

This put extreme stress on certain segments of

our portfolio in 2011. You can see that stress in our

credit quality numbers, a measurement which shows

the percentage of loans that are of “acceptable” credit

quality (for more information on these definitions,

please see page 14). At the end of 2010, as you can

see on the chart above, our percentage of loans with

“acceptable” credit quality was 93.3 percent. It dropped

to a low of 92.6 percent in August (which is the lowest

that it’s been since MidAtlantic was formed in 2000),

and it has slowly crept back up to 94.4 percent by the

end of 2011.

We’re hopeful that this most recent upward trend

signals that we’ve turned a corner in our credit quality,

and that it will continue to hold or improve in 2012

and beyond.

One thing that adversely influenced our credit quality

during 2011 was a small handful of very large loans that

unfortunately entered bankruptcy. Because of their size,

and the high visibility of the companies themselves,

these loans became highly publicized. As these stories

garnered attention in the press, we found that our

Opening the door of opportunity“As a loan officer, I love to see the look on people’s faces when they realize that Farm Credit can work with them to take advantage of an open door of opportunity,” says Mary Jane Roop. “We definitely understand farming, and what a farmer needs to be successful in business today.”

But the door that Mary Jane most likes to see open is the one to her customers’ homes. “Being invited to sit at the kitchen table and talk about a person’s finances is a wonderful feeling. I never take it for granted that my customers trust me and trust Farm Credit.”

MARY JANE ROOP

$44

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$38

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$32

.3

$50.

3

$45

.2

3

8%

3

9%

4

5%

34%

36

%

9

7.4%

9

5.5%

93.

0%

93.

3%

94

.4%

2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011

Net Income(in millions)

Operating Expenses as a Percentage of Net Interest and

Noninterest Income(in percent)

Acceptable Credit Quality

(in percent)

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borrowers and the community were worried about the

stability of our association and the health of our larger

portfolio, given what looked to be very large losses.

Our first commitment has always been to customer

confidentiality. But as more and more details were

published (some of which were completely inaccurate),

we realized that the information was public, and we

would be better served answering any questions honestly

and thoroughly (again, keeping in mind that private

information would continue to be kept private by us).

None of the issues mentioned above was going to

materially impact our association, or our commitment

to serving the borrowers in our territory. We felt that it

was our role to share information in a timely, accurate,

and transparent way. We did that throughout the

year using a variety of media: we created a website

to give breaking news in one instance of a highly

publicized bankruptcy, we communicated with our

affected borrowers both in person and through mailed

information, and we utilized social media to keep the

public informed of sometimes quickly-changing events.

While we are always disheartened when one of

our borrowers faces such financial stress that they

can no longer operate their business, we did learn

valuable lessons this year regarding the importance

of communications. In 2011, more than ever, we

reaffirmed one of our core values as a cooperative: the

value of being open and honest with our borrowers.

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ge“I want people to be successful,” says Stuart Cooper, an area manager in the DelMarVa region. “If I can help a borrower be more productive because my door was open, that’s what I want to do.”

Although the office door is open every day, many customers prefer to have Stuart come to visit them on the farm. “I know how hard it can be to find time for a meeting,” he says, “so I’m happy to go see my customers. Farm Credit offers competitive rates and products, but service is what really sets us apart.”

STUART COOPER

2007 2008 2009 2010 2011

Patronage Distribution(in millions)

$

28.0

$

24.5

$

17.7

$25.

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$25.

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1%

Poul

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21%

Cash

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20

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Cash

Gra

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22%

Cash

Cra

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23%

2007 2008 2009 2010 2011

Largest CommodityConcentration

(in percent)

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What’s behind door number two?

As one of our directors said to me this year, the

worry isn’t the risks that we’re aware of—we have a

plan for them, and a proven history of addressing them

and preparing for them. The biggest worry for us is the

challenges that we don’t see coming.

We don’t have a crystal ball, but we did take some

strides this year towards being more aware of some of

the challenges that may be in the wings.

In 2011, we moved forward with an Enterprise

Risk Management (ERM) initiative. ERM is a risk-

based approach to managing an enterprise, integrating

concepts of internal controls, the Sarbanes-Oxley Act

(also called the Corporate and Auditing Accountability

and Responsibility Act), and strategic planning. This

year, we began assessing our risks in 122 separate

areas—and have just completed the task of narrowing

that list down to a number that we believe are the

most significant and that we should actively manage

and measure.

ERM doesn’t mean that there won’t still be surprises,

but it does mean that we will be better prepared for

them when they surface. We will continue this initiative

throughout 2012, and hope to make it a transparent,

integrated part of everything we do in the coming years.

Opening doors for long-term careers

One risk that we see on the horizon is a threat

to our stable workforce. MidAtlantic has been lucky

when it comes to employees; historically, our average

turnover rate has been lower than the industry average.

But while people like to work here, we know that our

workforce is rapidly reaching the eligibility age for Mar

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“I used to work at a commercial bank and really liked my job,” recalls Pat Lindemeyr, customer services specialist. “ There was an opening at Farm Credit and several employees who knew me thought I would fit in well. Before I made the move, I visited the office during my lunch hour to see how things were done and if I would fit in with the culture. I can now say without a doubt that applying for the position and walking through the open door at Farm Credit was the best thing I have ever done!

Because of the open door environment I feel really comfortable with my coworkers and management. When you genuinely love everyone you work with, you tend to grow both professionally and personally. Everyone at Farm Credit is down to earth and willing to help you meet your goals.”

PAT LINDEMEYR

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retirement. In fact, 39 percent of our workforce will be

eligible for retirement by 2017. Twenty-eight percent of

our employees are eligible now.

We know that our staff is what truly sets us apart

when it comes to being a service provider. That’s why

we’ve made a substantial commitment in 2011 to our

training department. We have implemented an on-line

training program, which offers curriculum that will help

our employees keep their skills current, and continue

to develop their careers. It is also a useful tool to help

us quickly train new employees, something that will

continue to be a priority in the coming years.

It is our goal to continue to provide you with the

highest level of service possible—and that means having

a well-trained, committed and motivated workforce.

As you can see, there are a lot of doors to

opportunity in our future. Our entire team is working on

making sure we recognize opportunity as well as risk—

and that we continue to manage your cooperative in a

way that communicates both with you, our members.

Please remember that this communication always

goes two ways. This is a borrower owned cooperative—

if you have any questions about how “your” business is

doing, our doors are always open to you.

Thank you for your continued patronage of

MidAtlantic Farm Credit.

J. Robert Frazee Chief Executive Officer

March 13, 2012

“When people walk through the doors at Farm Credit, they know that they’re going to have a different kind of experience than they would with most banks,” says loan officer Jamie Whitacre. “A lot of the employees—like myself—actually own farms, so we understand the challenges first hand.”

“We all enjoy working with farmers, and building relationships with them. It’s very rewarding to me personally to see the farmers and the orchardists in my area do well. I feel fortunate that I can be a part of someone’s success.”

JAMIE WHITACRE

2007 2008 2009 2010 2011

Members’ Equity(in millions)

2007 2008 2009 2010 2011

Net Loans(in millions)

$1

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$2,1

73.2

$2,

267.

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$2,

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$

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$

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$

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7

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Report of Management

March 13, 2012

The accompanying consolidated financial statements and related financial information appearing throughout this annual report have been prepared by management of MidAtlantic Farm Credit, ACA in accordance with generally accepted accounting principles appropriate in the circumstances. Amounts which must be based on estimates represent the best estimates and judgments of management. Management is responsible for the integrity, objectivity, consistency, and fair presentation of the consolidated financial statements and financial information contained in this report.

Management maintains and depends upon an internal accounting control system designed to provide reasonable assurance that transactions are properly authorized and recorded, that the financial records are reliable as the basis for the preparation of all financial statements, and that the assets of the Association are safeguarded. The design and implementation of all systems of internal control are based on judgments required to evaluate the costs of controls in relation to the expected benefits and to determine the appropriate balance between these costs and benefits. The Association maintains an internal audit program to monitor compliance with the systems of internal accounting control. Audits of the accounting records, accounting systems and internal controls are performed and internal audit reports, including appropriate recommendations for improvement, are submitted to the Board of Directors.

The consolidated financial statements have been examined by independent certified public accountants, whose report appears elsewhere in this annual report. The Association is also subject to examination by the Farm Credit Administration.

The consolidated financial statements, in the opinion of management, fairly present the financial condition of the Association. The undersigned certify that we have reviewed the 2011 Annual Report of MidAtlantic Farm Credit, ACA, that the report has been prepared under the oversight of the audit committee of the Board of Directors and in accordance with all applicable statutory or regulatory requirements, and that the information contained herein is true, accurate, and complete to the best of our knowledge and belief.

Gary L. Grossnickle Chairman of the Board


John E. Wheeler, Jr. Chief Financial Officer

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Report on Internal Control Over Financial Reporting

March 13, 2012

The Association’s principal executives and principal financial officers, or persons performing similar functions, are responsible for establishing and maintaining adequate internal control over financial reporting for the Association’s 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 the Association’s 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 the Association, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial information in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the Association, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Association’s assets that could have a material effect on its Consolidated Financial Statements.

The Association’s management has completed an assessment of the effectiveness of internal control over financial reporting as of December 31, 2011. 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, the Association concluded that as of December 31, 2011, the internal control over financial reporting was effective based upon the COSO criteria. Additionally, based on this assessment, the Association determined that there were no material weaknesses in the internal control over financial reporting as of December 31, 2011.


John E. Wheeler, Jr. Chief Financial Officer

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Consolidated Five-Year Summary of Selected Financial DataConsolidated Five-Year Summary of Selected Financial Data

December 31,(dollars in thousands) 2011 2010 2009 2008² 20072

Balance Sheet DataCash $ 3,238 $ 5,316 $ 1,651 $ 1,550 $ 4,645Loans 2,168,894 2,279,313 2,288,344 2,190,189 1,997,435 Less: allowance for loan losses 11,075 17,421 21,020 16,983 11,556 Net loans 2,157,819 2,261,892 2,267,324 2,173,206 1,985,879 Investments in other Farm Credit institutions 34,513 34,916 30,673 29,991 29,357 Other property owned 1,895 1,338 1,008 — 100 Other assets 54,341 57,508 57,359 55,959 55,914 Total assets $2,251,806 $2,360,970 $2,358,015 $2,260,706 $2,075,895Notes payable to AgFirst Farm Credit Bank¹ $1,784,988 $1,917,156 $1,944,081 $1,852,726 $1,681,469Accrued interest payable and other liabilities with maturities of less than one year 46,121 47,296 43,533 54,420 52,862 Total liabilities 1,831,109 1,964,452 1,987,614 1,907,146 1,734,331 Capital stock and participation certificates 9,444 9,273 11,232 11,576 11,601 Retained earnings Allocated 207,881 188,125 167,428 156,869 147,803 Unallocated 203,892 199,534 192,164 185,520 182,603Accumulated other comprehensive income (loss) (520) (414) (423) (405) (443) Total members’ equity 420,697 396,518 370,401 353,560 341,564 Total liabilities and members’ equity $2,251,806 $2,360,970 $2,358,015 $2,260,706 $2,075,895

Statement of Income Data Net interest income $ 68,799 $ 63,076 $ 57,010 $ 55,131 $ 53,761 Provision for loan losses 14,550 11,600 11,700 6,488 2,225Noninterest income (expense), net (9,078) (1,222) (13,001) (9,875) (7,381) Net income $ 45,171 $ 50,254 $ 32,309 $ 38,768 $ 44,155

Key Financial Ratios Rate of return on average: Total assets 1.96% 2.17% 1.40% 1.78% 2.20% Total members’ equity 10.91% 12.90% 8.85% 10.90% 12.97% Net interest income as a percentage of average earning assets 3.19% 2.88% 2.58% 2.64% 2.80% Net (charge-offs) recoveries to average loans (0.93%) (0.67%) (0.34%) (0.05%) (0.01%)Total members’ equity to total assets 18.68% 16.79% 15.71% 15.64% 16.45% Debt to members’ equity (:1) 4.35 4.95 5.37 5.39 5.08Allowance for loan losses to loans 0.51% 0.76% 0.92% 0.78% 0.58% Permanent capital ratio 16.57% 15.23% 13.96% 14.11% 15.26% Total surplus ratio 16.19% 14.79% 13.50% 13.61% 14.69% Core surplus ratio 16.00% 14.21% 12.93% 11.90% 13.03%

Net Income Distribution Estimated patronage refunds:

Cash $ 10,000 $ 10,000 $ 8,000 $ 13,400 $ 11,886 Qualified allocated retained earnings — — 4,110 — — Nonqualified allocated retained earnings 15,599 15,756 5,577 11,077 16,149 Nonqualified retained earnings 15,034 16,277 7,580 10,490 10,136

¹ General financing agreement is renewable on a one-year cycle. The next renewal date is December 31, 2012.² Amounts reflect the combined accounts and operations of MidAtlantic and Valley Farm Credit.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands, except as noted)

GENERAL OVERVIEW

The following commentary summarizes the financial condition and results of operations of MidAtlantic Farm Credit, ACA, (Association) for the year ended December 31, 2011 with comparisons to the years ended December 31, 2010 and December 31, 2009. This information should be read in conjunction with the Consolidated Financial Statements, Notes to the Consolidated Financial Statements and other sections in this Annual Report. The accompanying consolidated financial statements were prepared under the oversight of the Audit Committee of the Board of Directors. For a list of the Audit Committee members, refer to the “Report of the Audit Committee” contained in this Annual Report. Information in any part of this Annual Report may be incorporated by reference in answer or partial answer to any other item of the Annual Report.

The Association is an institution of the Farm Credit System (System), which was created by Congress in 1916 and has served agricultural producers for over 95 years. The System’s mission is to maintain and improve the income and well-being of American farmers, ranchers, and producers or harvesters of aquatic products and farm-related businesses. The System is the largest agricultural lending organization in the United States. The System is regulated by the Farm Credit Administration, (FCA), which is an independent safety and soundness regulator.

The Association is a cooperative, which is owned by the members (also referred to throughout this Annual Report as stockholders or shareholders) served. The territory of the Association extends across a diverse agricultural region of Delaware, Maryland, Pennsylvania, Virginia and West Virginia. Refer to Note 1, “Organization and Operations,” of the Notes to the Consolidated Financial Statements for counties in the Association’s territory. The Association provides credit to farmers, ranchers, rural residents, and agribusinesses. Our success begins with our extensive agricultural experience and knowledge of the market.

The Association obtains funding from AgFirst Farm Credit Bank (AgFirst or Bank). The Association is materially affected and shareholder investment in the Association could be affected by the financial condition and results of operations of the Bank. Copies of the Bank’s Annual and Quarterly Reports are on the AgFirst website, www.agfirst.com, or may be obtained at no charge by calling 1-800-845-1745, extension 2832, or writing Susanne Caughman, AgFirst Farm Credit Bank, P.O. Box 1499, Columbia, SC 29202.

Copies of the Association’s Annual and Quarterly Reports are also available upon request free of charge on the Association’s website, www.mafc.com, or by calling 1-800-333-7950, or writing John E. Wheeler, Jr., Chief Financial Officer, MidAtlantic Farm Credit, ACA, 45 Aileron Court, Westminster, MD, 21157. The Association prepares an electronic version of the Annual Report, which is available on the website, within 75 days after the end of the fiscal year and distributes the Annual Reports to shareholders within 90 days after

the end of the fiscal year. The Association prepares an electronic version of the Quarterly Report, which is available on the internet, within 40 days after the end of each fiscal quarter, except that no report needs to be prepared for the fiscal quarter that coincides with the end of the fiscal year of the Association.

FORWARD LOOKING INFORMATION

This annual information statement contains forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. Words such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or other variations of these terms are intended to identify the forward-looking statements. These statements are based on assumptions and analyses made in light of experience and other historical trends, current conditions, and expected future developments. However, actual results and developments may differ materially from our expectations and predictions due to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties include, but are not limited to:

•political,legal,regulatoryandeconomicconditionsanddevelopments in the United States and abroad;

•economicfluctuationsintheagricultural,ruralutility,international, and farm-related business sectors;

•weather-related,disease,andotheradverseclimaticorbiological conditions that periodically occur that impact agricultural productivity and income;

•changesinUnitedStatesgovernmentsupportoftheagricultural industry and the Farm Credit System, as a government-sponsored enterprise, as well as investor and rating-agency reactions to events involving other government-sponsored enterprises and other financial institutions; and

•actionstakenbytheFederalReserveSysteminimplementingmonetary policy.

AGRICULTURAL OUTLOOK

The following United States Department of Agriculture (USDA) analysis provides a general understanding of the U.S. agricultural economic outlook. However, this outlook does not take into account all aspects of the Association’s business. References to the USDA information in this section refer to the entire U.S. agricultural market and are not limited to the Association.

The February 2012 USDA forecast estimates 2011 farmers’ net cash income, which is a measure of the cash income after payment of business expenses, increased to $108.7 billion, up $16.4 billion from 2010 and up $28.4 billion from its 10-year average of $80.3 billion. The improvement in 2011 farmers’ net cash income was due

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primarily to increases in crop receipts of $24.0 billion and livestock receipts of $24.6 billion, partially offset by a $34.7 billion increase in cash expenses.

The February 2012 USDA forecast for the farm economy, as a whole, projects 2012 farmers’ net cash income to decrease to $96.3 billion, a $12.4 billion decrease from 2011, but $16.0 billion above the 10-year average. The forecasted decrease in farmers’ net cash income for 2012 is primarily due to an expected increase in cash expenses of $11.3 billion, while crop and livestock receipts remain near the 2011 levels.

For 2012, the USDA expects crop receipts to increase slightly, as increases in corn and most other feed grains offset declines in wheat, hay, vegetables/melons, and fruits/tree nuts. The drought in parts of the U.S. in 2011 is expected to depress sales of many crops through its negative impact on production. Livestock receipts are expected to decline marginally in 2012. While receipts for cattle are anticipated to increase as demand for beef in the Asian markets remains strong, dairy receipts are expected to decrease as milk prices are forecast to be lower.

The following table sets forth the commodity prices per bushel for certain crops and by hundredweight for poultry and milk from December 31, 2008 to December 31, 2011:

Commodity 12/31/11 12/31/10 12/31/09 12/31/08Corn $ 5.86 $ 4.82 $ 3.60 $ 4.11Soybeans $11.50 $11.60 $ 9.80 $ 9.24Wheat $ 7.19 $ 6.45 $ 4.87 $ 5.95Milk $ 19.80 $ 16.70 $ 15.92 $ 15.90Poultry $ 89.79 $ 84.94 $ 81.63 $ 85.28

The USDA’s income outlook varies depending on farm size, geographic location, and commodity specialties. The USDA classifies all farms into three primary categories: commercial farms, intermediate farms and rural residential farms. Commercial farms, large scale farms with gross sales greater than $250 thousand, represent about 12 percent of U.S. farms by number but represent over 80 percent of total U.S. farm production. Commercial farms are expected to have a 17 percent increase in average net cash income in 2011. Intermediate farms, defined as ones in which the primary occupation is farming and gross sales are between $10 thousand and $250 thousand, represent 28 percent of U.S. farms by number and account for 18 percent of total production. Intermediate farms are expected to have a 14 percent increase in average net cash income in 2011. The remaining 60 percent of U.S. farms are classified as rural residential farms where the primary occupation is not farming and the farms produce less than $10 thousand in sales. Rural residential farms only account for 2 percent of total production.

In addition to farmers’ net cash income, off-farm income is an important source of funds for the repayment of farm debt

obligations and is less subject to cycles in agriculture. However, off-farm income can be directly affected by conditions in the general economy. The USDA measures farm household income, which is defined as earnings from farming activities plus off-farm income. Nearly 100 percent of farm household income for operators of rural residential farms and approximately 90 percent of farm household income for intermediate farms is generated from off-farm sources. Further, USDA data suggests that approximately 24 percent of farm household income for commercial farms is generated from off-farm income.

According to the USDA’s February 2012 forecast, farm sector asset values and farm debt are forecasted to rise modestly in 2012. Farm sector asset values are expected to rise 5.6 percent from $2.34 trillion for 2011 to $2.47 trillion in 2012 primarily due to an increase in the value of farm real estate. The values of machinery/equipment, purchased inputs and financial assets are expected to rise modestly in 2012, while the value of livestock and poultry inventories is expected to decline slightly. The main factors driving higher farmland values are the continued strength of commodity prices, low interest rates, expectations of continued favorable net returns and growth in agricultural exports. Farmer’s equity (farm business assets minus debt) is expected to rise 5.7 percent from $2.10 trillion in 2011 to $2.22 trillion in 2012.

One measure of the financial health of the agricultural sector used by the USDA is the assessment of farmers’ utilization of their capacity to repay debt (actual debt as a percentage of maximum debt that can be supported by farmers’ current income). Higher capacity utilization rates indicate tighter cash flow positions and, consequently, higher exposure to financial risk. Lower rates indicate healthier cash flow and financial positions. These estimates do not take into account, however, off-farm income sources. Since 1970, debt repayment capacity utilization has ranged from a low of 37 percent in 1973 to a high of 110 percent in 1981, and has remained relatively stable since 1987, averaging about 50 percent. The forecast for 2012 predicts farmers’ utilization to increase from 40 percent in 2011 to approximately 47 percent for 2012.

As estimated by the USDA in February 2012, the Farm Credit System’s market share of farm business debt, defined as debt incurred by those involved in on-farm agricultural production, grew to 41.4 percent at December 31, 2010 (latest available data), as compared with 40.1 percent at December 31, 2009. Overall, farm business debt is forecasted to increase in 2012 to $254.1 billion from $244.8 billion in 2011.

In general, agriculture has experienced a sustained period of favorable economic conditions due to stronger commodity prices, higher farm land values, and, to a lesser extent, government support programs. To date, the Association’s financial results have remained favorable as a result of the favorable agricultural


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economic conditions. Production agriculture, however, remains a cyclical business that is heavily influenced by commodity prices. In an environment of less favorable economic conditions in agriculture and without sufficient government support programs, the Association’s financial performance and credit quality measures would likely be negatively impacted. Conditions in the general and agricultural economies remain volatile given the state of the global economy. Certain agriculture sectors, as described more fully in this Management’s Discussion and Analysis, experienced significant financial stress during 2011 and could well continue to experience financial stress in 2012. Any negative impact from these less favorable conditions should be lessened by geographic and commodity diversification and the influence of off-farm income sources supporting agricultural-related debt. However, agricultural borrowers who are more reliant on off-farm income sources may be more adversely impacted by a weakened general economy.

CRITICAL ACCOUNTING POLICIES

The financial statements are reported in conformity with accounting principles generally accepted in the United States of America. Our significant accounting policies are critical to the understanding of our results of operations and financial position because some accounting policies require us to make complex or subjective judgments and estimates that may affect the value of certain assets or liabilities. We consider these policies critical because management must make judgments about matters that are inherently uncertain. For a complete discussion of significant accounting policies, see Note 2, “Summary of Significant Accounting Policies,” of the Notes to the Consolidated Financial Statements. The following is a summary of certain critical policies.

•Allowance for loan losses — 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 for loan losses is increased through provisions for loan losses and loan recoveries and is decreased through allowance reversals and loan charge-offs. The allowance for loan losses is determined based on a periodic evaluation of the loan portfolio by management in which numerous factors are considered, including economic and political conditions, loan portfolio composition, credit quality and prior loan loss experience.

Significant individual loans are evaluated based on the borrower’s overall financial condition, resources, and payment record, 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 encompasses various judgments, evaluations and appraisals with respect to the loans and their underlying security that, by nature, contains elements of uncertainty and imprecision. Changes in the agricultural economy and their borrower repayment capacity will cause these various judgments, evaluations and appraisals to change over

time. Accordingly, actual circumstances could vary from the Association’s expectations and predictions of those circumstances.

Management considers the following factors in determining and supporting the levels of allowance for loan losses: the concentration of lending in agriculture, combined with uncertainties in farmland values, commodity prices, exports, government assistance programs, regional economic effects and weather-related influences. Changes in the factors considered by management in the evaluation of losses in the loan portfolios could result in a change in the allowance for loan losses and could have a direct impact on the provision for loan losses and the results of operations.

•Valuation methodologies — Management applies various valuation methodologies to assets and liabilities that often involve a significant degree of judgment, particularly when liquid markets do not exist for the particular items being valued. Quoted market prices are referred to when estimating fair values for certain assets for which an observable liquid market exists, such as most investment securities. Management utilizes significant estimates and assumptions to value items for which an observable liquid market does not exist. Examples of these items include impaired loans, other property owned, pension and other postretirement benefit obligations, and certain other financial instruments. These valuations require the use of various assumptions, including, among others, discount rates, rates of return on assets, repayment rates, cash flows, default rates, costs of servicing and liquidation values. The use of different assumptions could produce significantly different results, which could have material positive or negative effects on the Association’s results of operations.

•Pensions — The Bank and its related Associations participate in defined benefit retirement plans. These plans are noncontributory and benefits are based on salary and years of service. In addition, the Bank and its related Associations also participate in defined contribution retirement savings plans. Pension expense for all plans is recorded as part of salaries and employee benefits. Pension expense for the defined benefit retirement plans is determined by actuarial valuations based on certain assumptions, including expected long-term rate of return on plan assets and discount rate. The expected return on plan assets for the year is calculated based on the composition of assets at the beginning of the year and the expected long-term rate of return on that portfolio of assets. The discount rate is used to determine the present value of our future benefit obligations. We selected the discount rate by reference to Aon Hewitt (a global human resources service provider) AA only above median corporate bond index, actuarial analyses and industry norms.

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ECONOMIC CONDITIONS

During 2011, economic conditions in our region, while generally favorable in comparison to the overall U.S. economy, particularly the rate of unemployment, continued to experience the adverse impact of the economic recession occurring in all sectors of the economy. Stockholders connected to the housing industry including timber, wood finishing, and greenhouses have continued to experience decreased product demand. Dairy continued its recovery which began in 2010. Overall, production continues to expand which is anticipated to result in limited profitability growth in this sector. Corn and soybean prices experienced a strong recovery in 2011 while production in our region was mixed depending upon weather conditions and irrigation capability. With continued demand for grain as an alternative fuel, grain prices are likely to be favorably impacted. The poultry industry has been particularly stressed in our region with the combination of supply exceeding demand, high feed costs and continued increase in environmental related regulations and restrictions.

Turmoil in the overall financial markets, and the banking sector in particular, has caused some commercial banks to reduce the amount of available credit to farmers and related businesses although we have begun to see this trend reversing somewhat in recent months. The number of active borrowers has increased from 9,416 at the end of 2010 to 9,682 at the end of 2011, an increase of 2.82 percent. A seasoned, knowledgeable lending staff and the inherent value of patronage paid under the cooperative structure have positioned the Association to compete effectively for this expanded business opportunity to serve the financing needs for agriculture in the Association’s territory, while retaining current members and their business relationships.

For the year December 31, 2011, the credit quality of the loan portfolio continued to be good with some slight adverse movements in quality measures compared to earlier reporting periods. In the third quarter of 2011, the Association experienced the lowest level of Acceptable and Other Assets Especially Mentioned (OAEM) in the Association’s history at 92.60 percent. By year end 2011, the credit quality had significantly improved with the settlement of two large commercial loans. (See section Credit Risk Management following for further information.) The increased volatility in the financial markets and the weak economy experienced over the past twelve months have not significantly affected either the overall farm sector or the majority of the Association’s customers in a materially adverse manner.

To the extent there has been any recent credit quality deterioration, that deterioration is largely driven by steady to increased input costs and decreased receipts for production. The price and volatility of fuel costs have continued to adversely impact all producers. Higher feed costs continue to challenge the livestock and poultry industries. Industries tied to housing such as forestry, sawmills, sod, and landscape nurseries have continued to experience reduced demand and profitability compromised. Over time, the higher inputs

are expected to ultimately either be passed on to the consumer or production will be cut to ensure that the supply produced will clear the market at prices that will generate a profit. The sector of the Association’s portfolio which has some reliance on off-farm income has continued to experience deterioration in conjunction with the global economic recession. In addition, some of the borrowers classified as loan type rural residential real estate have also been adversely affected by the recession which has put some pressure on this segment of the portfolio. While the credit quality of the Association loan portfolio has been negatively impacted to date by the factors mentioned above, there certainly remains the risk of future deterioration.

During 2011, the Association continued to target certain areas of our business with the goal of increasing market share. As in 2010, in 2011 the Association continued its expansion of its farm equipment financing program which provides an efficient electronic loan application process for farm equipment financing. Continued efforts are being made to expand services, increase public knowledge of our services and streamline our current delivery of products to enhance our existing portfolio. In addition, the merger at the end of 2008 further diversified the Association’s portfolio and expanded its territory.

LOAN PORTFOLIO

The Association provides funds to farmers, rural homeowners, and farm-related businesses for financing of short- and intermediate-term loans and long-term real estate mortgage loans through numerous product types.

The diversification of the Association loan volume by type for each of the past three years is shown below.

December 31, Loan Type 2011 2010 2009

(dollars in thousands)

Real estate mortgage $1,153,432 53.18% $1,157,946 50.80% $1,136,164 49.65%

Production and intermediate term 830,302 38.28 894,384 39.24 934,878 40.85

Processing and marketing 44,034 2.03 57,552 2.52 100,701 4.40

Farm related business 72,353 3.34 79,354 3.48 53,861 2.35

Rural residential real estate 29,470 1.36 33,195 1.46 35,420 1.55

Loans to cooperatives 22,639 1.04 48,684 2.14 27,320 1.20

Communication 12,321 .57 8,217 .36 — —

Energy 4,343 .20 (19) — — —

Total $2,168,894 100.00% $2,279,313 100.00% $2,288,344 100.00%

While we make loans and provide financially related services to qualified borrowers in the agricultural and rural sectors and to certain related entities, our loan portfolio is diversified.

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The geographic distribution of the loan volume by region for the past three years is as follows:

December 31, Region 2011 2010 2009

Delmarva 38% 36% 36%MidMaryland 25 25 25Penn 21 21 23Valley 8 7 8Corporate 8 11 8 Total 100% 100% 100%

Corporate includes the Association’s participation loans purchased as well as all nonaccruing loans.

Commodity and industry categories are based upon the Standard Industrial Classification system published by the federal government. The system is used to assign commodity or industry categories based upon the largest agricultural commodity of the customer.

The major commodities in the Association loan portfolio are shown below. The predominant commodities are cash grain/crops, poultry, landlords/lessors of real estate, and dairy, which constitute 63 percent of the entire portfolio.

December 31, Commodity Group 2011 2010 2009


Cash Grain/Crops $ 507,293 23% $ 507,256 22% $ 462,215 20%

Poultry 426,831 20 423,278 19 459,552 20

Landlords/Lessors of Real Estate 212,359 10 234,209 10 250,658 11

Dairy 208,744 10 225,745 10 242,104 11

Equine 187,246 9 198,164 9 201,930 9

Nurseries/ Greenhouses 134,695 6 140,501 6 144,729 6

Livestock/Animal Specialties 131,203 6 125,260 5 116,978 5

Fruits & Vegetables 107,339 5 116,259 5 130,100 6

Timber/Forestry 99,987 4 109,597 5 116,470 5

Other 153,197 7 199,044 9 163,608 7 Total $2,168,894 100% $2,279,313 100% $2,288,344 100%

Repayment ability is closely related to the commodities produced by our borrowers, and increasingly, the off-farm income of borrowers. The Association’s loan portfolio is well diversified from both a commodity and number of producers perspective. Further, many of the Association’s members are diversified within their enterprise which also reduces overall risk exposure. Demand for poultry, milk and prices of field grains are some of the factors affecting the price of these commodities. While the Association has experienced an increase in large loans over the past several years, the agricultural enterprise mix of these loans is diversified and similar to that of the overall portfolio. The risk in the portfolio associated with

commodity concentration and large loans is reduced by the range of diversity of enterprises in the Association’s territory.

The average daily balance in gross loan volume for the twelve months ended December 31, 2011, continues to be well diversified with no significant industry or producer concentration.

During 2011, the Association continued its activity in the buying and selling of loan participations within the Farm Credit System (FCS) as well as external to the FCS. This program provides an important vehicle to the Association by enabling it to further spread credit risk and enhance portfolio diversification while also affording an opportunity of strengthening its capital position through the generation of interest and fee income. As of December 31, 2011, participation loans purchased from other FCS institutions was $146,423 and $61,902 were purchased from non-FCS institutions, totaling $208,325 of participation loans purchased. Purchases are offset by $185,724 in participation loans which were sold. Total participation loans purchased and sold were $217,648 and $211,929, respectively, as of December 31, 2010 and $209,649 and $287,866, respectively, as of December 31, 2009.

The Association did not have any loans sold with recourse, retained subordinated participation interests in loans sold, or interests in pools of subordinated participation interests for the year ended December 31, 2011.

The Association sells qualified long-term mortgage loans into the secondary market. For the periods ended December 31, 2011, 2010 and 2009, the Association originated loans for resale totaling $77,691, $92,824 and $112,542, respectively which were sold into the secondary market.

The Association also participates in the Farmer Mac Long Term Stand-By program. Farmer Mac was established by Congress to provide liquidity to agricultural lenders. At December 31, 2011, 2010 and 2009, the Association had loans amounting to $4,953, $6,989 and $11,182, respectively, which were 100 percent guaranteed by Farmer Mac.

Prior to the merger with the former Valley Farm Credit which was effective as of December 31, 2008, as part of their capital management, Valley had sold loans to the Bank as a part of the District Capitalized Participation Pool (DCPP). The DCPP is a capital management tool in which the Association can sell loans to the Bank. The amount of loans outstanding under the DCPP aggregated $8,665, $9,693 and $10,923 at December 31, 2011, 2010, and 2009, respectively.

The Association additionally has loans wherein a certain portion of the loans are guaranteed by various governmental entities for the purpose of reducing risk. At December 31, 2011, the balance of these loans was $80,074.

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MISSION-RELATED INVESTMENTS

During 2005, the FCA initiated an investment program to stimulate economic growth and development in rural areas. The FCA outlined a program to allow System institutions to hold such investments, subject to approval by the FCA on a case-by-case basis. FCA approved the Rural America Bonds pilot under the mission-related investments umbrella, as described below.

In October 2005, the FCA authorized AgFirst and the Associations to make investments in Rural America Bonds under a three-year pilot period. Rural America Bonds may include debt obligations issued by public and private enterprises, corporations, cooperatives, other financing institutions, or rural lenders where the proceeds would be used to support agriculture, agribusiness, rural housing, or economic development, infrastructure, or community development and revitalization projects in rural areas. Examples include investments that fund value-added food and fiber processors and marketers, agribusinesses, commercial enterprises that create and maintain employment opportunities in rural areas, community services, such as schools, hospitals, and government facilities, and other activities that sustain or revitalize rural communities and their economies. The objective of this pilot program is to help meet the growing and diverse financing needs of agricultural enterprises, agribusinesses, and rural communities by providing a flexible flow of money to rural areas through bond financing. These bonds may be classified as Loans or Investments on the Consolidated Balance Sheets depending on the nature of the investment. As of December 31, 2011, 2010, and 2009, the Association had $296, $1,244, and $1,272, respectively, in Rural America Bonds, and they are classified as Loans on the Consolidated Balance Sheets.

CREDIT RISK MANAGEMENT

Credit risk arises from the potential inability of an obligor to meet its repayment obligation. As part of the process to evaluate the success of a loan, the Association continues to review the credit quality of the loan portfolio on an ongoing basis. With the approval of the Association Board of Directors, the Association establishes underwriting standards and lending policies that provide direction to loan officers. Underwriting standards include, among other things, an evaluation of:

•Character–borrowerintegrityandcredithistory

•Capacity–repaymentcapacityoftheborrowerbasedoncashflows from operations or other sources of income

•Collateral–protectionforthelenderintheeventofdefaultand a potential secondary source of repayment

•Capital–abilityoftheoperationtosurviveunanticipatedrisks

•Conditions–intendeduseoftheloanfundsandloanterms

The credit risk management process begins with an analysis of the borrower’s credit history, repayment capacity, and financial position. Repayment capacity focuses on the borrower’s ability to repay the loan based upon cash flows from operations or other sources of income, including non-farm income. Real estate loans must be collateralized by first liens on the real estate (collateral). As required by FCA regulations, each institution that makes loans on a collateralized basis must have collateral evaluation policies and procedures. Real estate mortgage loans may be made only in amounts up to 85 percent of the original appraised value of the property taken as collateral or up to 97 percent of the appraised value if guaranteed by a state, federal, or other governmental agency. The actual loan to appraised value when loans are made is generally lower than the statutory maximum percentage. Appraisals are required for loans of more than $250,000. In addition, each loan is assigned a credit risk rating based upon the underwriting standards. This credit risk rating process incorporates objective and subjective criteria to identify inherent strengths, weaknesses, and risks in a particular relationship.

We review the credit quality of the loan portfolio on an ongoing basis as part of our risk management practices. Each loan is classified according to the Uniform Classification System, which is used by all Farm Credit System institutions. Below are the classification definitions.

•Acceptable–Assetsareexpectedtobefullycollectibleandrepresent the highest quality.

•OtherAssetsEspeciallyMentioned(OAEM)–Assetsarecurrently collectible but exhibit some potential weakness.

•Substandard–Assetsexhibitsomeseriousweaknessinrepayment capacity, equity, and/or collateral pledged on the loan.

•Doubtful–Assetsexhibitsimilarweaknessestosubstandardassets. However, doubtful assets have additional weaknesses in existing facts, conditions and values that make collection in full highly questionable.

•Loss–Assetsareconsidereduncollectible.

The following table presents selected statistics related to the credit quality of loans including accrued interest at December 31.

Credit Quality 2011 2010 2009Acceptable & OAEM 94.43% 93.26% 93.00%Substandard 5.57 6.74 7.00Doubtful — — —Loss — — —

Total 100.00% 100.00% 100.00%

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Nonperforming Assets

The Association’s loan portfolio is divided into performing and high-risk categories. A Special Assets Management Department is responsible for servicing loans classified as high-risk. The high-risk assets, including accrued interest, are detailed below:

December 31, High-risk Assets 2011 2010 2009


Nonaccrual loans $69,556 $77,965 $48,683Restructured loans 9,246 — —Accruing loans 90 days past due — 230 1,244

Total high-risk loans 78,802 78,195 49,927

Other property owned 1,895 1,338 1,008

Total high-risk assets $80,697 $79,533 $50,935

Ratios

Nonaccrual loans to total loans 3.21% 3.42% 2.13%High-risk assets to total assets 3.58% 3.37% 2.16%

Nonaccrual loans represent all loans where there is a reasonable doubt as to the collection of principal and/or future interest accruals, under the contractual terms of the loan. In substance, nonaccrual loans reflect loans where the accrual of interest has been suspended. Nonaccrual loans decreased $8,409 or 10.79 percent in 2011. The significant decrease occurred principally in the fourth quarter of 2011 when settlement occurred on large loans in the timber and poultry sectors resulting in a net decrease from the end of the third quarter in nonaccrual loans from $87,650 to $69,556, a decrease of $18,094 or 20.64 percent. Otherwise, nonaccrual loans are not concentrated in any specific sector of the Association’s portfolio. Of the $69,556 in nonaccrual volume at December 31, 2011, $30,010 or 43.15 percent, compared to 50.51 percent and 40.87 percent at December 31, 2010 and 2009, respectively, was current as to scheduled principal and interest payments, but did not meet all regulatory requirements to be transferred into accrual status.

Loan restructuring is available to financially distressed borrowers. Restructuring of loans occurs when the Association grants a concession to a borrower based on either a court order or good faith in a borrower’s ability to return to financial viability. The concessions can be in the form of a modification of terms or rates, a compromise of amounts owed, or deed in lieu of foreclosure. Other receipts of assets and/or equity to pay the loan in full or in part are also considered restructured loans. The type of alternative financing structure chosen is based on minimizing the loss incurred by both the Association and the borrower.

Allowance for Loan Losses

The allowance for loan losses at each period end was considered by Association management to be adequate to absorb probable losses existing in and inherent to its loan portfolio.

The following table presents the activity in the allowance for loan losses for the most recent three years:

Year Ended December 31, Allowance for Loan Losses Activity: 2011 2010 2009


Balance at beginning of year $ 17,421 $ 21,020 $ 16,983Charge-offs: Real estate mortgage (6,038) (407) (438) Production and intermediate term (13,239) (14,964) (3,566) Agribusiness (2,172) (63) (3,824) Rural residential real estate (69) (109) (269) Total charge-offs (21,518) (15,543) (8,097)

Recoveries: Real estate mortgage 90 64 4 Production and intermediate term 521 272 405 Agribusiness — 2 25 Rural residential real estate 11 6 — Total recoveries 622 344 434Net (charge-offs) recoveries (20,896) (15,199) (7,663)Provision for loan losses 14,550 11,600 11,700

Balance at end of year $ 11,075 $ 17,421 $ 21,020

Ratio of net (charge-offs) recoveries during the period to average loans outstanding during the period (0.93%) (0.67% (0.34%)

The net loan charge-offs in 2011 were primarily associated with timber and wood finishing operations and poultry related loans.

The allowance for loan losses by loan type for the most recent three years is as follows:

Allowance for Loan December 31, Losses by Type 2011 2010 2009


Real estate mortgage $ 2,300 $ 3,481 $ 4,321Production and

intermediate term 7,564 12,351 15,340Agribusiness 874 1,375 1,203Energy 22 20 —Communication 15 9 —Rural residential real estate 300 185 156

Total allowance $11,075 $17,421 $21,020

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The allowance for loan losses as a percentage of loans outstanding and as a percentage of certain other credit quality indicators is shown below:

Allowance for Loan Losses December 31, as a Percentage of: 2011 2010 2009

Total loans 0.51% 0.76% 0.92%Nonaccrual loans 15.92% 22.34% 43.18%

Please refer to Note 3, “Loans and Allowance for Loan Losses,” of the Notes to the Consolidated Financial Statements, for further information concerning the allowance for loan losses.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income was $68,799, $63,076 and $57,010 in 2011, 2010 and 2009, respectively. Net interest income is the difference between interest income and interest expense. Net interest income is the principal source of earnings for the Association and is impacted by volume, yields on assets and cost of debt. The effects of changes in average volume and interest rates on net interest income over the past three years are presented in the following table:

Change in Net Interest Income:

Nonaccrual Volume* Rate Income Total


12/31/11 - 12/31/10Interest income $(2,039) $ (4,539) $1,817 $ (4,761)Interest expense (739) (9,916) 171 (10,484)Change in net interest income $(1,300) $ 5,377 $1,646 $ 5,723

12/31/10 - 12/31/09Interest income $ (918) $ (3,944) $ 369 $ (4,493)Interest expense (657) (10,100) 198 (10,559)Change in net interest income $ (261) $ 6,156 $ 171 $ 6,066

*Volume variances can be the result of increased/decreased loan volume or from changes in the percentage composition of assets and liabilities between periods.

Noninterest Income

Noninterest income for each of the three years ended December 31 is shown in the following table:

Percentage For the Year Ended Increase/(Decrease)

December 31, 2011/ 2010/Noninterest Income 2011 2010 2009 2010 2009 (dollars in thousands)

Loan fees $ 1,658 $ 2,103 $ 2,490 (21.16%) (15.54%)

Fees for financially related services 1,555 1,924 1,796 (19.18) 7.13

Patronage refund from other Farm Credit Institutions 19,751 20,456 17,892 (3.45) 14.33

Gains (losses) on other property owned, net (1,041) (269) (20) (286.99) NM

Gains (losses) on sales of rural home loans, net 1,479 1,419 1,007 4.23 40.91

Gains (losses) on sales of premises and equipment, net 163 125 34 30.40 267.65

Insurance Fund refund — 3,753 — (100.00) 100.00

Other noninterest income expense (55) 404 433 (113.61) (6.70)

Total noninterest income $23,510 $29,915 $23,632 (21.41%) 26.59%

Noninterest income in 2010 included the one-time Insurance Fund Refund of $3,753. Other noninterest income (expense) in 2011 includes a $500 accrual for estimated losses on loan commitments. Fees for financially related services are related principally to the crop insurance program and the Association’s income will vary depending upon product usage and commissions earned.

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Noninterest Expense

Noninterest expense for each of the three years ended December 31 is shown in the following table:

Percentage For the Year Ended Increase/(Decrease)

December 31, 2011/ 2010/Noninterest Expense 2011 2010 2009 2010 2009


Salaries and employee benefits $23,617 $22,235 $23,924 6.22% (7.06%)

Occupancy and equipment 2,552 2,489 2,500 2.53 ( .44)

Insurance Fund premiums 1,174 997 3,761 17.75 (73.49)

Other operating expenses 5,782 5,492 5,587 5.28 (1.70)

Total noninterest expense $33,125 $31,213 $35,772 6.13% (12.74%)

Noninterest expense increased $1,912 or 6.13 percent for the year ended December 31, 2011, as compared to the same period in 2010 and decreased $4,559 or 12.74 percent in 2010 compared to the 2009 year.

Salaries and employee benefits increased $1,382 or 6.22 percent in 2011 as compared to 2010. This increase includes a $495 retirement and other post retirement benefits increase principally attributable to the difference in retirement plan actuarial assumptions for 2011 as compared to 2010. The remaining salaries and employee benefits variance of $887 is primarily attributable to 2011 salary adjustments, increases in active and retiree health benefits and a decrease in deferred personnel costs applicable to certain loan activity as required in accordance with generally accepted accounting principles. See Note 10, “Employee Benefit Plans,” of the Notes to the Consolidated Financial Statements, for further information. Salaries and benefits in 2009 included approximately $927 of one-time expenses related to the merger with Valley Farm Credit.

The Insurance Fund premium increased $177 or 17.75 percent in 2011 as compared to 2010. The increase resulted from the Farm Credit System Insurance Corporation announcement in January 2011 to increase the insurance premium for 2011 effective January 1, 2011. For 2011, the insurance premium was .06 percent of loans (6 basis points) as compared to 5 basis points for 2010.

Occupancy and equipment and Other operating expenses increased a total of $353 or 4.42 percent primarily attributable to an increase in training, travel and purchased services expenses. The Association’s efficiency ratio, which is calculated as Operating Expenses as a percentage of Net interest income plus Total noninterest income continues to be among the lowest in the AgFirst District and significantly below the average efficiency ratio for the District. If the Association’s Operating Expenses averaged the District average, then Operating Expenses would be approximately $6.1 million higher which would result in a decrease of the same amount to Income before income taxes.

Income Taxes

The Association recorded a benefit for income taxes of $537 for the year ended December 31, 2011, as compared to a benefit of $76 for 2010 and a provision of $861 for 2009. The 2011 benefit principally relates to utilization of a net operating loss carryback. Refer to Note 2, “Summary of Significant Accounting Policies, Income Taxes,” and Note 9, “Income Taxes,” of the Notes to the Consolidated Financial Statements, for more information concerning Association income taxes.

Key Results of Operations Comparisons

Key results of operations comparisons for each of the twelve months ended December 31 are shown in the following table:

Key Results of For the 12 Months Ended Operations Comparisons 12/31/11 12/31/10 12/31/09

Return on average assets 1.96% 2.17% 1.40%

Return on average members’ equity 10.91% 12.90% 8.85%Net interest income as a percentage of average earning assets 3.19% 2.88% 2.58%Net (charge-offs) recoveries to average loans (0.93%) (0.67%) (0.34%)

A key factor in maintaining and growing the net income for future years will be an increase in Acceptable loan volume, continued improvement in net interest income and controlling loan losses, while effectively managing noninterest income and noninterest expense. The current economic recession continues to impact certain sectors of the Association’s portfolio and could continue to adversely impact the Association until economic stability in the country is restored. In 2011, the Association recorded a provision for loan losses of $14,550 and charge-offs (net of recoveries) of $20,895, both of which were historic highs for the Association. The past three years have been favorably impacted by the receipt of Special Patronage distributions from AgFirst Farm Credit Bank which totaled $4,799, $4,759, and $2,339 in 2011, 2010 and 2009, respectively. The Association does not forecast continued receipt of these distributions.

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The Association’s pension plans have also been negatively impacted which increased the financial accounting required impact on 2011 employee benefits expense. The fiscal stability of the Association enables it, during these turbulent times, to continue to emphasize its goals to: consistently meet the needs of our membership by providing quality loan products, generate earnings which are sufficient to fund operations, assure the adequate capitalization of the Association, and achieve an acceptable rate of return for stockholders. To meet these goals, the Association will continue its efforts of attracting and retaining high quality, competitively priced, loan volume while effectively managing credit risk in the entire loan portfolio. With the assistance of outside consultants, the Association is currently in the process of implementing an Enterprise Risk Management (ERM) process which is expected to further aid the Association in its management of both short and long-term risks. The Association will continue to actively evaluate new or modified products, including recommendations and initiatives offered in conjunction with System projects.

LIQUIDITY AND FUNDING SOURCES

Liquidity and Funding

The principal source of funds for the Association is the borrowing relationship established with the Bank through a General Financing Agreement (GFA). The GFA utilizes the Association’s credit and fiscal performance as criteria for establishing a line of credit on which the Association may draw funds. The Bank advances the funds to the Association, creating notes payable (or direct loans) to the Bank. The Bank manages interest rate risk through direct loan pricing and asset/liability management. The notes payable are segmented into variable rate and fixed rate components. The variable rate note is utilized by the Association to fund variable rate loan advances and operating funds requirements. The fixed rate note is used specifically to fund fixed rate loan advances made by the Association. Association capital levels effectively create a borrowing margin between the amount of loans outstanding and the amount of notes payable outstanding. This margin is commonly referred to as “Loanable Funds.”

Total notes payable to the Bank at December 31, 2011, was $1,784,988 as compared to $1,917,156 at December 31, 2010 and $1,944,081 at December 31, 2009. The decrease of 6.89 percent compared to December 31, 2010 was attributable to loan paydowns which were not offset by new loans as potential borrowers remained extremely cautious reflective of the lingering economic recession as well as the Association’s increase in member’s equity attributable to net income. Since the beginning of 2009, loans have decreased $21,295 or 0.93 percent while Member’s Equity has increased $67,137 or 18.99 percent. The average volume of outstanding notes

payable to the Bank was $1,863,401 and $1,901,271 for the years ended December 31, 2011 and 2010, respectively. Refer to Note 7, “Notes Payable to AgFirst Farm Credit Bank,” of the Notes to the Consolidated Financial Statements, for weighted average interest rates and maturities, and additional information concerning the Association’s notes payable.

Liquidity management is the process whereby funds are made available to meet all financial commitments including the extension of credit, payment of operating expenses and payment of debt obligations. The Association receives access to funds through its borrowing relationship with the Bank and from income generated by operations. The liquidity policy of the Association is to manage cash balances to maximize debt reduction and to increase loan volume. As borrower payments are received, they are applied to the Association’s note payable to the Bank. The Association’s participation in the Farmer Mac agreements, and other secondary market programs provides additional liquidity. Sufficient liquid funds have been available to meet all financial obligations. There are no known trends likely to result in a liquidity deficiency for the Association.

The Association has a net settlement agreement with CoBank, ACB to settle transactions between the two institutions daily to an aggregate line of credit of $30 million. The Association had no other lines of credit from third party financial institutions as of December 31, 2011.

Funds Management

The Bank and the Association manage assets and liabilities to provide a broad range of loan products and funding options, which are designed to allow the Association to be competitive in all interest rate environments. The primary objective of the asset/liability management process is to provide stable and rising earnings, while maintaining adequate capital levels by managing exposure to credit and interest rate risks.

Demand for loan types is a driving force in establishing a funds management strategy. The Association offers fixed, adjustable and variable rate loan products that are marginally priced according to financial market rates. Variable rate loans may be indexed to market indices such as the Prime Rate or the 90-day London Interbank Offered Rate (LIBOR). Adjustable rate mortgages are indexed to U.S. Treasury Rates. Fixed rate loans are priced based on the current cost of System debt of similar terms to maturity.

The majority of the interest rate risk in the Association’s Consolidated Balance Sheets is transferred to the Bank through the notes payable structure. The Bank, in turn, actively utilizes funds management techniques to identify, quantify and control risk associated with the loan portfolio.

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Relationship with the Bank

The Association’s statutory obligation to borrow only from the Bank is discussed in Note 7, “Notes Payable to AgFirst Farm Credit Bank,” of the Notes to the Consolidated Financial Statements in this Annual Report.

The Bank’s ability to access capital of the Association is discussed in Note 4, “Investments in other Farm Credit institutions,” of the Notes to the Consolidated Financial Statements.

The Bank’s role in mitigating the Association’s exposure to interest rate risk is described in the “Liquidity and Funding” section of this Management’s Discussion and Analysis and in Note 7, “Notes Payable to AgFirst Farm Credit Bank,” included in this Annual Report.

CAPITAL RESOURCES

Capital serves to support asset growth and provide protection against unexpected credit and interest rate risk and operating losses. Capital is also needed for future growth and investment in new products and services.

The Association Board of Directors establishes, adopts, and maintains a formal written capital adequacy plan to ensure that adequate capital is maintained for continued financial viability, to provide for growth necessary to meet the needs of members/borrowers, and to ensure that all stockholders are treated equitably. There were no material changes to the capital plan for 2011 that would affect minimum stock purchases or would have an effect on the Association’s ability to retire stock and distribute earnings. During 2010, the Association completed its plan to address certain differences in member capital requirements in connection with the Valley merger.

Total members’ equity at December 31, 2011, increased 6.10 percent to $420,697 from the December 31, 2010, total of $396,518. At December 31, 2010, total members’ equity increased 7.05 percent from the December 31, 2009 total of $370,401. The 2011 increase was primarily attributed to net income net of various patronage related distributions and the net impact of capital stock/participation certificates issued/retired. See statement “Consolidated Statements of Changes in Members’ Equity” in this Annual Report for further details.

FCA sets minimum regulatory capital requirements for System banks and associations. Capital adequacy is evaluated using a number of regulatory ratios. According to the FCA regulations, each institution’s permanent capital ratio is calculated by dividing permanent capital by a risk-adjusted asset base. Risk adjusted assets mean the total dollar amount of the institution’s assets adjusted by an appropriate credit conversion factor as defined by regulation. For all periods represented, the Association exceeded the minimum regulatory standard for all of the ratios.

The Association’s capital ratios as of December 31 and the FCA minimum requirements follow:

Regulatory 2011 2010 2009 Minimum

Permanent capital ratio 16.57% 15.23% 13.96% 7.00%Total surplus ratio 16.19% 14.79% 13.50% 7.00%Core surplus ratio 16.00% 14.21% 12.93% 3.50%

The increase in the Association’s permanent capital, total surplus and core surplus at December 31, 2011 was attributed to net income, net of patronage distributions, decreased investment in AgFirst stock, an increase in the Association’s capital stock and participation certificates outstanding, and a reduction in loan volume outstanding. There are no trends, commitments, contingencies, or events that are likely to affect the Association’s ability to meet regulatory minimum capital standards and capital adequacy requirements.

See Note 8, “Members’ Equity,” of the Consolidated Financial Statements, for further information concerning capital resources.

PATRONAGE PROGRAM

Prior to the beginning of any fiscal year, the Association’s Board of Directors, by adoption of a resolution, may establish a Patronage Allocation Program to distribute its available consolidated net earnings. This resolution provides for the application of net earnings in the manner described in the Association’s Bylaws. This includes the setting aside of funds to increase surplus to meet minimum capital adequacy standards established by FCA Regulations, to increase surplus to meet Association capital adequacy standards to a level necessary to support competitive pricing at targeted earnings levels, and for reasonable reserves for necessary purposes of the Association. After excluding net earnings attributable to (a) the portion of loans participated to another institution, and (b) participation loans purchased, remaining consolidated net earnings are eligible for allocation to borrowers. Refer to Note 8, “Members’ Equity,” of the Notes to the Consolidated Financial Statements, for more information concerning the patronage distributions. The Association declared patronage distributions of $25,599 in 2011, $25,756 in 2010, and $17,687 in 2009.

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YOUNG, BEGINNING AND SMALL (YBS) FARMERS AND RANCHERS PROGRAM

The Association’s mission is to provide financial services to agriculture and the rural community, which includes providing credit to Young*, Beginning** and Small*** farmers. Because of the unique needs of these individuals, and their importance to the future growth of the Association, the Association has established annual marketing goals to serve the financing needs of YBS farmers. Specific marketing plans have been developed to target these groups, and resources have been designated to help ensure YBS borrowers access to a stable source of credit.

The following table outlines the number of borrowers, the number of YBS loans in the portfolio and the loan volume outstanding (shown in thousands) for the past two years.

As of December 31, 2011 (dollars in thousands)

Number of Number of Amount of Borrowers Loans Loans

Young 1,910 3,126 $ 279,184Beginning 3,014 4,626 584,008Small 6,664 10,345 959,653

As of December 31, 2010 (dollars in thousands)

Number of Number of Amount of Borrowers Loans Loans

Young 1,966 3,241 $ 303,525Beginning 3,110 4,819 645,818Small 6,749 10,689 1,016,122

For 2011, MidAtlantic’s quantitative goals were to book 900 new business relationships, of which 50 percent or more shall meet one or more of the established criteria for designation as Young, Beginning, or Small, and to maintain or increase its overall levels of lending to Young, Beginning and Small business relationships as represented by overall percentages of the 2007 USDA Census numbers (the most recent numbers available) in MidAtlantic’s territory.

The goal for booking new business relationships (BEs) was achieved as evidenced by the following table:

New BEs 1,042Young BEs 273 or 26.2% of the totalBeginning BEs 416 or 39.9% of the totalSmall BEs 775 or 74.4% of the total

The overall goal of 50 percent or greater of the new BEs being designated either Y, B or S was achieved as 813 or slightly over 78 percent qualified as Y, B or S. Furthermore, while not specifically the goal, the S category exceeded 50 percent.

MidAtlantic was able to achieve a small increase in the overall number of farmers served within its territory, however the three categories, Y, B and S each declined slightly (comparisons are against USDA data for each category).

MAFC MAFC USDA MAFC as % MAFC as %

2007 % YBS territory USDA territory USDA Census USDA 12/31/10 12/31/10 12/31/11 12/31/11

Total Farmers 32,999 100.0% 8,573 26.0% 8,594 26.0%

Young 2,770 8.4% 1,787 64.5% 1,735 62.6%Beginning 8,949 27.1% 2,810 31.4% 2,716 30.4%Small 27,952 84.7% 6,125 21.9% 6,027 21.6%

The working definitions of Young and Beginning include a criteria of borrower age and years farming. With the passage of time, existing borrowers will move out of these two categories regardless of any operational changes or lending activities.

MidAtlantic successfully implemented a new program in 2008, Start Right that focuses on the needs of Young, Beginning, Small and Minority farmers. Since implementation, over $95.1 million of Start Right loans have been booked, with over $59.6 million outstanding as of year-end 2011.

The Start Right program includes several outreach efforts to Young, Beginning, Small and Minority (YBSM) farmers. MidAtlantic continues to use its YBSM Advisory Committee which is convened periodically to ensure that the Association meets the unique needs of this group. During 2011, the Continuing Education Module of Start Right offered an online educational program called AgBiz Masters focusing on everything from macroeconomics to marketing to the importance of creating a business plan. You can read more about Start Right on the Association’s website, www.mafc.com.

In addition to our Start Right program, MidAtlantic also supports a Trade Credit program, Dealer Express. This program, supported through local equipment dealers within our territory, has further enhanced the YBS service of the Association. The Dealer Express program has also helped to increase sales by local equipment dealers, which promotes economic growth in the rural communities.

The Association had the goal of serving YBS through extensive outreach programs that included activities in marketing, education, training, and financial support. The Association continues previously sponsored outreach/sponsorship activities in which the Association participated for the purpose of promoting and supporting YBS efforts, as well as incorporated new outreach/sponsorships to continue building the Association’s commitment to YBS. The Association’s website, www.mafc.com, contains an entire section of information and resources specifically applicable to YBS visitors to the site.

The Association continues its participation in specific credit programs and partnerships that we have developed to help small farmers, young farmers and farmers just starting out. It includes programs offered by the Farm Service Agency (FSA), such as guaranteed and direct loans to qualifying borrowers. The Association has earned the distinction of a “preferred lender,” the highest status designated by FSA.

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In addition to FSA guaranteed loans, the Association is also a Guaranteed Participating Lender for the Small Business Administration (SBA), which offers lending programs specifically for small borrowers, and also participates in a number of State lending programs that promote the agriculture industry and environmental stewardship. The Association also offers flexible financing options in-house for qualifying borrowers.

The Association remains fully committed to serving the financing needs of YBS borrowers and will continue to evaluate its programs and efforts in order that they will be even more effective in 2012. The Association includes YBS goals in the annual strategic plan, and reports on those goals and achievements to the board of directors on a quarterly basis.

The Association is committed to the future success of young, beginning and small farmers.

* Young farmers are defined as those farmers, ranchers, producers or harvesters of aquatic products who are age 35 or younger as of the date the loan is originally made.

** Beginning farmers are defined as those farmers, ranchers, producers or harvesters of aquatic products who have 10 years or less farming or ranching experience as of the date the loan is originally made.

*** Small farmers are defined as those farmers, ranchers, producers or harvesters of aquatic products who normally generate less than $250,000 in annual gross sales of agricultural or aquatic products at the date the loan is originally made.

REGULATORY MATTERS

For the twelve months ended December 31, 2011, the FCA took no enforcement action against the Association.

On August 18, 2011, the FCA published for comment an amendment to the regulations governing investments held by institutions of the System. Comments were due November 16, 2011. The stated objectives of the proposed rule are to:

•ensurethattheBanksholdsufficienthighquality,readilymarketable investments to provide sufficient liquidity to continue operations and pay maturing obligations in the event of market disruption;

•strengthenthesafetyandsoundnessofSysteminstitutions;

•seekcommentsonhowtheFCAcancomplywithsection939Aof the Dodd-Frank Act, which requires the FCA to remove all references to and requirements relating to credit ratings from its regulations and to substitute other appropriate standards of creditworthiness;

•reduceregulatoryburdenwithrespecttoinvestmentsthatfailto meet eligibility criteria after purchase or are unsuitable; and

•enhancetheabilityoftheSystemtosupplycredittoagriculture and aquatic producers by ensuring adequate availability to funds.

On August 26, 2011, the FCA published for comment an advance notice of proposed rulemaking regarding various references to and requirements of reliance on crediting ratings issued by NRSROs of a security or money-market instrument. Section 939A of the Dodd-Frank Act requires Federal agencies to remove any reference to or requirement of reliance upon credit ratings, and substitute in their place standards of creditworthiness that they deem appropriate for the regulations. The FCA seeks public comment on alternatives to the use of credit ratings in the regulations. Comments were due November 25, 2011.

On November 1, 2011, the FCA published for comment the draft Second Amended and Restated Market Access Agreement (MAA), which is an Agreement between the Banks and the Funding Corporation. Comments were due December 1, 2011. No comments were received by the FCA with respect to the draft MAA. The MAA was executed by the Banks and the Funding Corporation with an effective date of January 1, 2012.

On December 27, 2011, the FCA published for comment a proposed rule to amend the liquidity regulation. The purpose of the proposed rule is to strengthen liquidity risk management at System Banks, improve the quality of assets in the liquidity reserve, and bolster the ability of System Banks to fund their obligations and continue their operations during times of economic, financial, or market adversity. Comments were due by February 27, 2012. The stated objectives of the rule are to:

• improvethecapacityofBankstopaytheirobligationsandfund their operations by maintaining adequate liquidity to withstand various market disruptions and adverse financial or economic conditions;

•strengthenliquiditymanagementatallBanks;

•enhancethemarketabilityofassetsthatBanksholdintheirliquidity reserve;

•establishasupplementalliquiditybufferthatBankscandrawupon during an emergency and that is sufficient to cover the Bank’s liquidity needs beyond the 90-day liquidity reserve; and

•strengtheneachBank’scontingencyfundingplan.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Please refer to Note 2, “Summary of Significant Accounting Policies,” in the Notes to the Consolidated Financial Statements for recently issued accounting pronouncements.

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Disclosure Required by Farm Credit Administration Regulations

DESCRIPTION OF BUSINESS

Descriptions of the territory served, persons eligible to borrow, types of lending activities engaged in, financial services offered and related Farm Credit organizations are incorporated herein by reference to Note 1 of the Notes to the Consolidated Financial Statements, “Organization and Operations,” included in this Annual Report to shareholders.

The description of significant developments that had or could have a material impact on earnings or interest rates to borrowers, acquisitions or dispositions of material assets, material changes in the manner of conducting the business, seasonal characteristics, and concentrations of assets, if any, is incorporated in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report to shareholders.

DESCRIPTION OF PROPERTY

The following table sets forth certain information regarding the properties of the reporting entity as of December 31, 2011:

LEGAL PROCEEDINGS

Information, if any, to be disclosed in this section is incorporated herein by reference to Note 12 of the Consolidated Financial Statements, “Commitments and Contingencies,” included in this Annual Report to shareholders.

DESCRIPTION OF CAPITAL STRUCTURE

Information to be disclosed in this section is incorporated herein by reference to Note 8 of the Consolidated Financial Statements, “Members’ Equity,” included in this Annual Report to shareholders.

DESCRIPTION OF LIABILITIES

The description of liabilities, contingent liabilities and obligations to be disclosed in this section is incorporated herein by reference to Notes 2, 7 and 12 of the Consolidated Financial Statements included in this Annual Report to shareholders.

Form of Location Description Ownership

1614 Churchville RoadSuite 102Bel Air, MD 21015 Branch Operations Rented

112 East Liberty StreetCharles Town, WV 25414 Satellite Office Rented

102 Morgnec RoadChestertown, MD 21620 Branch Operations Owned

379 Deep Shore RoadDenton, MD 21629 Branch Operations Owned

1410 South State StreetDover, DE 19901 Branch Operations Owned

105 Railroad AvenueEast New Market, MD 21631 Branch Operations Owned

925 North East StreetFrederick, MD 21701 Branch Operations Owned

20816 DuPont BoulevardGeorgetown, DE 19947 Branch Operations Owned

1260 Maryland AvenueSuite 109Hagerstown, MD 21740 Branch Operations Rented

411 West Roseville RoadLancaster, PA 17601 Branch Operations Owned

Form of Location Description Ownership

158 Crimson CircleMartinsburg, WV 25403 Branch Operations Owned

1035 Ocean HighwayPocomoke, MD 21851 Branch Operations Owned

680 Robert Fulton HighwayQuarryville, PA 17566 Branch Operations Owned

6546 Mid Atlantic LaneSalisbury, MD 21804 Branch Operations Owned

1513 Main StreetShoemakersville, PA 19555 Branch Operations Owned

45 Aileron Court AdministrativeWestminster, MD 21157 Headquarters Owned

700 Corporate Center Court Suite LWestminster, MD 21157 Branch Operations Rented

125 Prosperity DriveWinchester, VA 22602 Branch Operations Owned

1031 South Main StreetWoodstock, VA 22664 Branch Operations Owned

South Main StreetWoodstock, VA 22664 Unimproved 1 acre lot Owned

Rented facilities are leased by the Association at prevailing market rates from independent third parties for periods not currently exceeding five years. The Association leases approximately 5,000 square feet of its

Winchester location comprising three suites. Two of the three suites are rented to Association Alliances: A New Century Realty and Farm Bureau. These alliances were formed to create opportunities for the Association

membership to have real estate and insurance services available in one building. In addition, approximately 1,800 square feet at the Martinsburg location is leased. All of the Association’s leases to third parties are

at prevailing market rates and expire not later than May 31, 2014.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which appears in this Annual Report to shareholders and is to be disclosed in this section, is incorporated herein by reference.

SENIOR OFFICERS

The following represents certain information regarding the senior officers of the Association and their business experience for the past five years.

Senior Officer Position

J. Robert Frazee President & Chief Executive Officer since January 2000. He serves as a board member of the Maryland Agricultural and Resource-Based Industry Development Corporation (MARBIDCO), (an economic development agency and financial intermediary).

Carl E. Naugle Sr. Vice President & Chief Credit Officer since January 2000. He serves as a board member of Farm Financial Standards Council (a non-profit which promotes uniformity and integrity in agriculture related financial reporting and analysis).

John E. Wheeler, Jr. Sr. Vice President & Chief Financial Officer since September 2004. He serves on Board Committees of St. Agnes HealthCare(healthcare,non-profit),boardmemberoftheAccountingAdvisoryBoard–SellingerSchoolofBusinessand Management at Loyola University Maryland (education, non-profit) and Trinity School, Inc. (education, non-profit).

Thomas J. Marshall Sr. Vice President & Director of Audit and Review since January 2004.

Linda K. Stum Sr. Vice President & Human Resources Officer since January 2000.

Sandra L. Wieber Sr. Vice President & Marketing Officer since September 2000.

James D. Aird Sr. Vice President & Regional Lending Manager since July 2000.

Thomas H. Truitt, Jr. Sr. Vice President & Regional Lending Manager since January 2009. Previously served as Sr. Vice President & Chief Information Officer since January 2000.

Jeffrey M. Tyson Sr. Vice President & Regional Lending Manager since July 2000.

Lloyd R. Webb Sr. Vice President & Regional Lending Manager since July 2000.

Tammy L. Price Sr. Vice President & Chief Information Officer since March 2009. Previously served Association in various positions in Information Technology Department since 2000.

Laura E. Bailey Vice President, Administrative Services and Corporate Secretary since December 2005 and had previously served as Corporate Secretary since July 2000.

The total amount of compensation earned by the CEO and by all senior officers as a group during the years ended December 31, 2011, 2010 and 2009, is as follows:

Name of Annual Individual or Deferred/ Number in Group Year Salary Bonus Perquisites Other Total

J. Robert Frazee 2011 $ 382,515 $185,777 — — $ 568,292

J. Robert Frazee 2010 $ 368,014 $163,568 — — $ 531,582

J. Robert Frazee 2009 $ 354,014 $159,313 — — $ 513,327

11 2011 $1,584,251 $518,982 $17,987 — $2,121,220

11 2010 $1,517,330 $401,976 $19,514 — $1,938,820

11 2009 $1,454,455 $411,036 $18,967 — $1,884,458

The compensation amounts included in the table for 2009 include the compensation for one senior officer from March 2009 when the individual was promoted to a senior officer position. Amounts in the table classified as Deferred/Perquisites is comprised primarily of automobile compensation, deferred compensation and life insurance.

In addition to base compensation, the Association offers an incentive plan to all employees. For all employees, credit quality goals, the payment of patronage distributions to the Association’s membership, and Association profit goals established in the incentive plan must be met before any incentive is paid. Total compensation paid under the plan ranges from 0 to 50 percent of base pay at the end of the plan year for senior officers depending upon the level of responsibility, and for all other employees, cannot exceed 20 percent of an employee’s base salary in effect at the end

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of the plan year. Established targets are measured at December 31, 2011 so that bonuses can be accrued in the plan year. Payment of accrued bonuses is made by March 15 following the close of the plan year.

Also, all employees are eligible to receive awards (a) based on years of service on five year, or multiple of five year, anniversaries, and (b) based on special or exemplary performance as defined in the plan. A copy of these plans is available to stockholders upon request.

Disclosure of information on the total compensation paid during 2011 to any senior officer, or to any other individual included in the total, is available to shareholders upon request.

DIRECTORS

Directors and senior officers are reimbursed on an actual cost basis for all expenses incurred in the performance of official duties. Such expenses may include transportation, lodging, meals, tips, tolls, parking of cars, laundry, registration fees, and other expenses associated with travel on official business. A copy of the policy is available to shareholders of the Association upon request.

The aggregate amount of reimbursement for travel, subsistence and other related expenses for all directors as a group was $276,895 for 2011, $300,607 for 2010 and $381,031 for 2009. The Association provides computers, printers and internet access to the directors to provide for an electronic means of communication. Internet access is reimbursed at the rate of $50 per month. Expenses for the computers and printers are accounted for in accordance with the Association’s equipment policy.

Subject to approval by the Board, directors are compensated for meeting attendance and special assignments. As of December 31, 2011, an honorarium of $450 per day is paid for meetings, committee meetings (reduced to $200 if occurring on the same day as daily honorarium) and special assignments. $100 is paid for telephone conference meetings. Committee chairs receive an additional $100 for each meeting of the Committee.

In addition to the honoraria, as of December 31, 2011, directors are paid a quarterly retainer fee of $1,000 and the chair and vice-chair are paid an additional $500 and $250, respectively. Directors are compensated at a per hour rate of $20 for travel time to Board meetings in excess of one hour. Total compensation paid to directors as a group was $380,845 for 2011.

The following represents certain information regarding Association Directors and their principal occupations during the past five years:

Gary L. Grossnickle, Chairman, is a dairy and crop farmer. His farm operation, Grossnickle Farms, Inc., consists of 1,300 acres (600 owned) in cultivation of corn, beans, wheat, barley, and grass hay and 260 cows and 200 replacement heifers. He is also involved in Grossnickle Limited Partnership, a real estate enterprise. He serves as Chairman of the Board and on the Executive Committee. During 2011, he served 11 days at Association Board meetings and 52 days in other official activities including various Board committees, and was paid $31,075. His term of office is 2011 to 2015.

Fred N. West, Vice Chairman, owns 180 acres with a 40,000 capacity poultry operation. He also co-owns Fred West Farms LLC, a 2,400 acre grain operation and F & F Farms LLC, an 80,000 capacity poultry operation with his son. He serves on the Sussex County Farm Bureau Board. He serves as Vice-Chariman of the Board and on the Executive Committee. During 2011, Mr. West served 11 days at Association Board meetings and 35 days in other official activities including various Board committees and was paid $22,785. His term of office is 2010 to 2014.

Paul D. Baumgardner owns Baumgardner’s Hay and Straw and Baumgardner Farms Landscaping. He is also a beef farmer and farms a total of 500 acres (150 acres owned). Within the past five years, he also owned Winchester Feed and Seed in Winchester, VA. During 2011, he served 11 days at Association Board meetings and 37 days in other official activities, including the Board Audit & Review Committee, and was paid $22,980. His term of office is 2011 to 2016.

Deborah A. Benner along with her husband, owns and operates Yippee Farms, consisting of three dairy facilities with 900 cows and 900 heifers, and cultivating 700 acres of cropland growing corn, alfalfa, rye and other grains. In addition, she serves as CEO of Yippee LLC, a holding company and of Murgolo Books, a publishing subsidiary of the LLC. She holds leadership positions in the Lancaster County Farm Bureau (President) and PTL India Partners (President, Advisory Board member, and Finance Committee member). During 2011, she served 10 days at Association Board meetings and 18 days in other official activities, including the Governance Committee and was paid $15,580. Her term of office is 2009 to 2012.

Brian L. Boyd is employed as feed mill manager for Mark Hershey Farms. He also owns and operates Boyd’s Custom Planting, custom planting soybeans and small grains and also a family farm operation on 14 acres, producing 80,000 chickens (480,000 per year). During 2011, he served 10 days at Association Board meetings and 20 days in other official activities, including the Human Resources Committee and was paid $15,970. His term of office is 2010 to 2014.

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Dale R. Hershey is senior partner in Hershey Brothers Dairy Farm, managing the operation’s real estate and cropping. The operation includes milking 300 cows, raising 250 herd replacements, and cultivating 650 acres of corn, alfalfa, soybeans, rye and barley. During 2011, he served 11 days at Association Board meetings and 29 days in other official activities, including the Human Resources Committee and the Communications Advocacy Program Committee and was paid $19,770. His term of office is 2011 to 2015. He also serves on the AgFirst Farm Credit Bank Board of Directors, including that Board’s Credit Committee, and the AgFirst District Farm Credit Council Board. Days of service disclosed for Mr. Hershey as a member of the MidAtlantic Board do not reflect activities in his capacity as an AgFirst board member. For further information related to specific duties, compensation, and days served in those positions, please see the AgFirst Farm Credit Bank 2011 Annual Report at www.agfirst.com.

Walter C. Hopkins and his son operate a dairy and grain farm consisting of 570 milk cows, 500 replacement heifers, and 1,000 acres of corn, alfalfa, grass and small grain. During 2011, Mr. Hopkins served 11 days at Association Board meetings and 27 days in other official activities including the Executive Committee, Human Resources Committee and the Communications Advocacy Program Committee, and was paid $19,210. His term of office is 2010 to 2013. Mr. Hopkins also serves on the AgFirst Farm Credit Bank District Advisory Committee and Plan Sponsor Committee. Days of service disclosed for Mr. Hopkins as a member of the MidAtlantic Board do not reflect activities in his capacity as a member of those committees.

T. Jeffery Jennings operates a farm consisting of 100-head beef cows, poultry facilities with capacity for 13,000 breeder hens, and cultivates 500 acres of corn, soybeans, hay, alfalfa, pasture, and timber. He serves as a director on the Board of the Culpeper Farmers’ Cooperative. During 2011, Mr. Jennings served 11 days at Association Board meetings and 31 days in other official activities including the Audit & Review Committee and Communications Advocacy Program Committee and was paid $20,520. His term of office is 2011 to 2015.

Harry M. “Marty” Kable is a crop farmer, auctioneer, and land developer. His crop operation consists of 2,200 acres, (500 of which are owned). He is also Vice President of Sunrise Shale, Inc. During 2011, he served 2 days at Association Board meetings and 6 days in other official activities including the Governance Committee and the Communications Advocacy Program Committee and was paid $4,940. He retired from the Board in 2011.

Christopher J. Kurtzman serves as one of the Board’s outside directors and its designated financial expert. He retired from McCormick & Company, Inc. in 2008 after 32 years of service. His most recent positions included VP for Operations Services in Europe, the Middle East, and Africa; VP of Supply Chain and Growth Optimization—Consumer Products Division; and Vice President & Treasurer. He is a Certified Public Accountant and holds a BBA degree in Accounting from the University of Notre Dame. During 2011, he served 11 days at Association Board meetings and 38 days in other official activities including the Audit & Review Committee and was paid $23,325. His term of office is 2010 to 2014.

M. Wayne Lambertson farming with his son, has a 1,650-acre cash grain operation (630 acres owned) producing soybeans, corn, and wheat. He also has a broiler operation of 54,000 replacement pullets. He is owner/president of Amen Corner LLC (poultry), president of Twin Oak Farms, Inc. (grain), a partner and vice-president of JWL Enterprises (construction), and a partner in Don’s Seafood Restaurant. During 2011, Mr. Lambertson served 10 days at Association Board meetings and 12 days in other official activities including the Governance Committee, and the Communications Advocacy Program Committee and was paid $13,355. His term of office is 2011 to 2015. Mr. Lambertson also serves as Board Chairman on the AgFirst Farm Credit Bank Board. In addition, he serves on the AgFirst District Farm Credit Council Board and on the National Farm Credit Council Board. Days of service disclosed for Mr. Lambertson as a member of the MidAtlantic Board do not reflect activities in his capacity as an AgFirst board member or Farm Credit Council board member. For further information related to specific duties, compensation, and days served in those positions, please see the AgFirst Farm Credit Bank 2011 Annual Report at www.agfirst.com.

Jim A. Long owns and operates his family farm consisting of 1,500 acres. There he finishes 115,000 tom turkeys as well as maintaining a 200 head Angus commercial cow calf herd and a four acre pot-in-pot wholesale ornamental tree nursery. He is president of the family corporation, Homer Long, Inc. and owner of Riverfields LLC. He serves as a Board and Audit Committee member of Valley Health System of Winchester, VA; a member of the Board of Trustees of Page Memorial Hospital in Luray, VA; and Chairman of the Board of Trustees at Shenandoah Memorial Hospital in Woodstock, VA; as well as a Board member of Homewood Retirement Centers of the Shenandoah Valley. During 2011, he served 3 days at Association Board meetings and 6 days in other official activities including the Executive Committee and Governance Committee and was paid $4,280. He retired from the Board in 2011.

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Fred R. Moore, Jr. owns and operates Fred R. Moore & Son, Inc. and Collins Wharf Sod, consisting of a 600 acre turf production and grain operation. In addition, he is a partner in a rental management firm. He also serves on the boards of the Wicomico County Farm Bureau, the Wicomico County Soil Conservation District and the Wicomico Farm Bureau. During 2011, Mr. Moore served 10 days at Association Board meetings and 28 days in other official activities including the Executive Committee and the Audit & Review Committee, and was paid $18,850. His term of office is 2010 to 2013.

Dale J. Ockels along with his two brothers, operates a family farming corporation. The operation includes tilling 4,400 acres of corn, soybeans, and wheat (1,000 acres owned) and a 60,000 capacity poultry operation. He serves as President of Ockels’ Farms, Inc. He also serves on the boards of the Sussex County Farm Bureau, Sussex County Soil Conservation District, Sussex County Land Trust, and on the Delaware Governor’s Council on Agriculture. During 2011, he served 10 days at Association Board meetings and 30 days in other official activities including the Governance Committee and was paid $19,540. His term of office is 2011 to 2015.

Jennifer L. Rhodes owns and operates Deerfield Farms LLC, a 110-acre poultry and grain operation, with her two sons. The operation consist of a four house poultry farm producing 440,000 broilers annually and a grain farm producing corn, wheat and soybeans. She is also employed as the Extension Educator for Agriculture and Natural Resources, University of MD Extension, Queen Anne’s County, Maryland. She holds leadership positions in the following organizations: County Board Member and State Committee Chair (poultry & eggs) for the Farm Bureau; Board member for Queen Anne’s Soil Conservation District; Board member for the non-profit Foundation for Community Partnership; Vice President, Executive Committee member and Grower Committee member for the non-profit Delmarva Poultry Industry, Inc. During 2011, she served 10 days at Association Board meetings and 29 days in other official activities including the Human Resources Committee and was paid $18,610. Her term of office is 2009 to 2012.

Dudley H. Rinker serves as vice president and general manager of Rinker Orchards, Inc., a family apple orchard of 150 acres and a cider business. In addition, he is vice president of Green, Inc. (a real estate rental firm) and manager of Rinker Properties LC (a land development firm). He serves as a director of Shenandoah Mutual Insurance, on the Board of the Peter S. Stickley Foundation, and as director/registered agent for Green Hill Cemetery. During 2011, he served 3 days at Association Board meetings and 17 days in other official activities including the Human Resources Committee and was paid $9,130. He retired from the Board in 2011.

Ralph L. Robertson, Jr. is co-owner with his wife of a 400-acre crop farm (240 acres are owned). The operation also includes contract dairy heifers, research cattle, and a cow-calf operation. He is also employed as a preservation manager with Carroll County, Maryland. He was previously a dairy farmer. He also serves on the boards of the Southern States Carroll Petroleum Cooperative and the New Windsor Progressive Farmers (Vice-President). During 2011, he served 10 days at Association Board meetings and 39 days in other official activities including the Executive Committee and the Audit & Review Committee (Chairman) and was paid $24,375. His term of office is 2010 to 2014.

Paul J. Rock is one of the Board’s outside directors. He is a Certified Public Accountant and an adjunct professor at McDaniel College in Westminster, MD. Within the last five years he was CFO of IOCC, an international humanitarian aid organization, and he is retired from McCormick and Company. He serves on the Board and on the Finance Committee of the Maryland 4-H Foundation and on the Board and as Treasurer for The Mission of Mercy (medical services non-profit). He holds memberships in the Maryland Association of CPAs, and the American Institute of Certified Public Accountants. During 2011, Mr. Rock served 11 days at Association Board meetings and 26 days in other official activities including the Human Resources Committee and was paid $18,125. His term of office is January 1, 2010 through December 31, 2014. Mr. Rock also serves on the AgFirst Farm Credit Bank District Plan Sponsor Committee. Days of service disclosed for Mr. Rock as a member of the MidAtlantic Board do not reflect activities in his capacity as a member of this committee.

Lingan T. Spicer is a grain and timber farmer. The grain portion of his business consists of 900 acres producing row crops (350 acres owned). The timber operation consists of 1,000 acres. He serves on the Dorchester County Forestry Board. During 2011, Mr. Spicer served 11 days at Association Board meetings and 32 days in other official activities including the Audit & Review Committee, and was paid $20,640. His term of office is 2011 to 2014.

Christopher R. Stiles operates a farm cultivating corn on 170 acres, and also operates a business which includes the treatment and land application of septic and sludge materials. Within the last five years, he was also a senior partner of Riggs and Stiles, Inc. (a dairy and grain operation) and was also engaged in the raising, processing, and marketing of fresh turkeys. During 2011, he served 10 days at Association Board meetings and 34 days in other official activities including the Governance Committee and was paid $21,020. His term of office is 2011 to 2013.

Rodger L. Wagner and his sons operate a dairy and grain farm consisting of 200 milk cows, 200 replacement heifers, and 750 acres of corn, alfalfa, and soybeans. He also serves on the Oley Township Ag Security Board. During 2011, he served 11 days at Association Board meetings and 21 days in other official activities including the Governance Committee and was paid $16,765. His term of office is 2009 to 2012.

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TRANSACTIONS WITH SENIOR OFFICERS AND DIRECTORS

The reporting entity’s policies on loans to and transactions with its officers and directors, to be disclosed in this section are incorporated herein by reference to Note 11 of the Consolidated Financial Statements, “Related Party Transactions,” included in this Annual Report to shareholders. There have been no transactions between the Association and senior officers or directors which require reporting per FCA regulations.

INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

There were no matters which came to the attention of management or the board of directors regarding involvement of current directors or senior officers in specified legal proceedings which should be disclosed in this section. No directors or senior officers have been involved in any legal proceedings during the last five years which require reporting per FCA regulations.

RELATIONSHIP WITH INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

There were no changes in or material disagreements with our independent certified public accountants on any matter of accounting principles or financial statement disclosure during this period.

For the year ended December 31, 2011, the Association paid fees and expenses of $75,986 for audit services rendered by its independent certified public accountants, PricewaterhouseCoopers, LLP.

CONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial statements, together with the report thereon of PricewaterhouseCoopers LLP dated March 13, 2012 and the report of management, which appear in this Annual Report to shareholders are incorporated herein by reference. Copies of the Association’s Annual and Quarterly reports are available upon request free of charge by calling 1-800-333-7950 or writing John E. Wheeler, Jr., MidAtlantic Farm Credit, ACA, 45 Aileron Court, Westminster, Maryland 21157-3022, or accessing the website, www.mafc.com. The Association prepares an electronic version of the Annual Report which is available on the Association’s website within 75 days after the end of the fiscal year and distributes the Annual Reports to shareholders within 90 days after the end of the fiscal year. The Association prepares an electronic version of the Quarterly report within 40 days after the end of each fiscal quarter, except that no report need be prepared for the fiscal quarter that coincides with the end of the fiscal year of the institution.

BORROWER INFORMATION REGULATIONS

Since 1972, Farm Credit Administration (FCA) regulations have required that borrower information be held in strict confidence by Farm Credit System (FCS) institutions, their directors, officers and employees. These regulations provide Farm Credit institutions clear guidelines for protecting their borrowers’ nonpublic personal information.

On November 10, 1999, the FCA Board adopted a policy that requires FCS institutions to formally inform new borrowers at loan closing of the FCA regulations on releasing borrower information and to address this information in the Annual Report to shareholders. The implementation of these measures ensures that new and existing borrowers are aware of the privacy protections afforded them through FCA regulations and Farm Credit System institution efforts.

CREDIT AND SERVICES TO YOUNG, BEGINNING, AND SMALL FARMERS AND RANCHERS AND PRODUCERS OR HARVESTERS OF AQUATIC PRODUCTS

Information to be disclosed in this section is incorporated herein by reference to the similarly named section in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section included in this Annual Report to shareholders.

SHAREHOLDER INVESTMENT

Shareholder investment in the Association could be affected by the financial condition and results of operations of AgFirst Farm Credit Bank (Bank or AgFirst). Copies of the Bank’s Annual and Quarterly reports are available upon request free of charge by calling 1.800.845.1745, ext. 2832, or writing Susanne Caughman, AgFirst Farm Credit Bank, P. O. Box 1499, Columbia, SC 29202. Information concerning AgFirst Farm Credit Bank can also be obtained by going to AgFirst’s web site at www.agfirst.com. The Bank prepares an electronic version of the Annual Report, which is available on the website, within 75 days after the end of the fiscal year and distributes the Annual Report to shareholders within 90 days after the end of the fiscal year. The Bank prepares an electronic version of the Quarterly report within 40 days after the end of each fiscal quarter, except that no report needs to be prepared for the fiscal quarter that coincides with the end of the fiscal year of the Bank.

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March 13, 2012

The Audit Committee of the Board of Directors (Committee) is comprised of the directors named below. None of the directors who serve on the Committee is an employee of MidAtlantic Farm Credit (Association) and in the opinion of the Board of Directors, each is free of any relationship with the Association or management that would interfere with the director’s independent judgment on the Committee.

The Committee has adopted a written charter that has been approved by the Board of Directors. The Committee has reviewed and discussed the Association’s audited financial statements with management, which has primary responsibility for the financial statements.

PricewaterhouseCoopers LLP (PwC), the Association’s independent certified public accountants for 2011, is responsible for expressing an opinion on the conformity of the Association’s audited financial statements with accounting principles generally accepted in the United States of America. The Committee has discussed with PwC the matters that are required to be discussed by Statement on Auditing Standards No. 114 (The Auditor’s Communication With Those Charged With Governance). PwC has provided to the Committee the written disclosures and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the Committee has discussed with PwC that firm’s independence.

The Committee has also concluded that PwC’s provision of non-audit services, if any, to the Association is compatible with PwC’s independence.

Based on the considerations referred to above, the Committee recommended to the Board of Directors that the audited financial statements be included in the Association’s Annual Report for 2011. The foregoing report is provided by the following independent directors, who constitute the Committee:

Ralph L. Robertson, Jr.

Chairman of the Audit Committee

Members of Audit Committee

Paul D. Baumgardner Christopher J. Kurtzman

T. Jeffery Jennings Fred R. Moore, Jr. Lingan T. SpicerLingan T. Spicer

Report of the Audit Committee

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Report of Independent Certified Public Accountants

Report of Independent Certified Public Accountants

To the Board of Directors and Membersof MidAtlantic Farm Credit, ACA

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in members’ equity and of cash flows present fairly, in all material respects, the financial position of MidAtlantic Farm Credit, ACA (the Association) and its subsidiaries at December 31, 2011, 2010 and 2009, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Association’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

March 13, 2012

PricewaterhouseCoopers LLP, 401 E. Las Olas Boulevard, Suite 1800, Fort Lauderdale, FL 33301 T: (954) 764-7111, F: (954) 525-4453, www.pwc.com/us

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Consolidated Balance Sheets

December 31, (dollars in thousands) 2011 2010 2009

AssetsCash $ 3,238 $ 5,316 $ 1,651

Loans 2,168,894 2,279,313 2,288,344 Less: allowance for loan losses 11,075 17,421 21,020 Net loans 2,157,819 2,261,892 2,267,324

Accrued interest receivable 12,593 12,978 13,725 Investments in other Farm Credit institutions 34,513 34,916 30,673Premises and equipment, net 13,436 13,792 14,345Other property owned 1,895 1,338 1,008Due from AgFirst Farm Credit Bank 18,225 18,751 17,442Other assets 10,087 11,987 11,847

Total assets $2,251,806 $2,360,970 $2,358,015

LiabilitiesNotes payable to AgFirst Farm Credit Bank $1,784,988 $1,917,156 $1,944,081Accrued interest payable 3,986 4,568 5,491Patronage refund payable 10,142 10,172 8,116Allocated surplus payable 8,819 11,005 6,915Other liabilities 23,174 21,551 23,011

Total liabilities 1,831,109 1,964,452 1,987,614

Commitments and contingencies

Members’ Equity Capital stock and participation certificates 9,444 9,273 11,232Retained earnings

Allocated 207,881 188,125 167,428Unallocated 203,892 199,534 192,164

Accumulated other comprehensive income (loss) (520) (414) (423)

Total members’ equity 420,697 396,518 370,401

Total liabilities and members’ equity $2,251,806 $2,360,970 $2,358,015

The accompanying notes are an integral part of these financial statements.

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For the year ended December 31, (dollars in thousands) 2011 2010 2009

Interest Income Loans $120,685 $125,446 $129,939

Interest Expense Notes payable to AgFirst Farm Credit Bank 51,886 62,370 72,929

Net interest income 68,799 63,076 57,010Provision for loan losses 14,550 11,600 11,700

Net interest income after provision for loan losses 54,249 51,476 45,310

Noninterest Income Loan fees 1,658 2,103 2,490Fees for financially related services 1,555 1,924 1,796Patronage refund from other Farm Credit institutions 19,751 20,456 17,892Gains (losses) on other property owned, net (1,041) (269) (20)Gains (losses) on sales of rural home loans, net 1,479 1,419 1,007Gains (losses) on sales of premises and equipment, net 163 125 34Insurance Fund refund — 3,753 —Other noninterest income (expense) (55) 404 433

Total noninterest income 23,510 29,915 23,632

Noninterest Expense Salaries and employee benefits 23,617 22,235 23,924Occupancy and equipment 2,552 2,489 2,500Insurance Fund premiums 1,174 997 3,761Other operating expenses 5,782 5,492 5,587

Total noninterest expense 33,125 31,213 35,772

Income before income taxes 44,634 50,178 33,170Provision (benefit) for income taxes (537) (76) 861

Net income $ 45,171 $ 50,254 $ 32,309


Consolidated Statements of Income

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Consolidated Statements of Changes in Members’ Equity

Capital Accumulated Stock and Retained Earnings Other Total

Participation Comprehensive Members’(dollars in thousands) Certificates Allocated Unallocated Income (Loss) Equity

Balance at December 31, 20081

Comprehensive income $11,576 $156,869 $185,520 $(405) $353,560 Net income 32,309 32,309 Employee benefit plans adjustments (Note 10) (18) (18) Total comprehensive income 32,291Capital stock/participation certificates issued/(retired), net (344) (344)Patronage distribution Cash (8,000) (8,000) Qualified allocated retained earnings 4,110 (4,110) — Nonqualified allocated retained earnings 5,577 (5,577) — Nonqualified retained earnings 7,580 (7,580) —Retained earnings retired (7,115) (7,115)Patronage distribution adjustment 407 (398) 9

Balance at December 31, 2009 11,232 167,428 192,164 (423) 370,401

Comprehensive income Net income 50,254 50,254 Employee benefit plans adjustments (Note 10) 9 9 Total comprehensive income 50,263Capital stock/participation certificates issued/(retired), net (1,959) (1,959)Patronage distribution Cash (10,000) (10,000) Nonqualified allocated retained earnings 15,756 (15,756) — Nonqualified retained earnings 16,277 (16,277) — Retained earnings retired (11,973) (11,973)Patronage distribution adjustment 637 (851) (214)

Balance at December 31, 2010 $ 9,273 $188,125 $199,534 $(414) $396,518

Comprehensive income Net income 45,171 45,171 Employee benefit plans adjustments (Note 10) (106) (106) Total comprehensive income 45,065Capital stock/participation certificates issued/(retired), net 171 171Patronage distribution Cash (10,000) (10,000) Nonqualified allocated retained earnings 15,599 (15,599) — Nonqualified retained earnings 15,034 (15,034) — Retained earnings retired (11,286) 701 (10,585)Patronage distribution adjustment 409 (881) (472)

Balance at December 31, 2011 $ 9,444 $207,881 $203,892 $(520) $420,697

¹ Amounts reflect the combined accounts and operations of MidAtlantic and Valley Farm Credit.


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Consolidated Statements of Cash Flows

For the year ended December 31, (dollars in thousands) 2011 2010 2009

Cash flows from operating activities: Net income $ 45,171 $ 50,254 $ 32,309Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation on premises and equipment 1,253 1,231 1,275 Amortization (accretion) of net deferred loan origination costs (fees) (393) (485) (639) Provision for loan losses 14,550 11,600 11,700 (Gains) losses on other property owned, net 1,041 269 20 (Gains) losses on sales of premises and equipment, net (163) (125) (34) Changes in operating assets and liabilities: (Increase) decrease in accrued interest receivable 385 747 726 (Increase) decrease in due from AgFirst Farm Credit Bank 526 (1,309) (3,045) (Increase) decrease in other assets 1,900 (140) 301 Increase (decrease) in accrued interest payable (582) (923) (1,390) Increase (decrease) in other liabilities 1,517 (1,451) 256 Total adjustments 20,034 9,414 9,170 Net cash provided by operating activities 65,205 59,668 41,479

Cash flows from investing activities: Net (increase) decrease in loans 85,016 (8,842) (106,490)(Increase) decrease in investment in other Farm Credit institutions 403 (4,243) (682)Purchases of premises and equipment (906) (684) (692)Proceeds from sales of premises and equipment 172 131 69Proceeds from sales of other property owned 3,302 2,560 283 Net cash provided by (used in) investing activities 87,987 (11,078) (107,512)

Cash flows from financing activities: Advances on (repayment of) notes payable to AgFirst Farm Credit Bank, net (132,168) (26,925) 91,355 Increase (decrease) in allocated surplus payable (2,186) 4,090 (4,438) Capital stock and participation certificates issued/(retired), net 171 (1,959) (344) Patronage refunds and dividends paid (10,502) (8,158) (13,324) Retained earnings retired (10,585) (11,973) (7,115) Net cash provided by (used in) financing activities (155,270) (44,925) 66,134Net increase (decrease) in cash (2,078) 3,665 101Cash, beginning of period 5,316 1,651 1,550Cash, end of period $ 3,238 $ 5,316 $ 1,651

Supplemental schedule of non-cash activities: Financed sales of other property owned $ 230 $ 69 $ — Receipt of property in settlement of loans 5,130 3,228 1,311 Estimated cash dividends or patronage distributions declared or payable 10,000 10,000 8,000 Employee benefit plans adjustments (Note 10) 106 (9) 18

Supplemental information: Interest paid $ 52,468 $ 63,293 $ 74,319 Taxes (refunded) paid, net (164) 151 1,458


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Notes to the Consolidated Financial Statements (dollars in thousands, except as noted)

interest on Systemwide debt obligations (Insured debt), (2) to ensure the retirement of protected borrower capital at par or stated value, and (3) for other specified purposes. The Insurance Fund is also available for discretionary uses by the Insurance Corporation to provide assistance to certain troubled System institutions and to cover the operating expenses of the Insurance Corporation. Each System bank has been required to pay premiums, which may be passed on to the Association, into the Insurance Fund, based on its annual average adjusted outstanding insured debt until the assets in the Insurance Fund reach the “secure base amount.” The secure base amount is defined in the Farm Credit Act as 2.0 percent of the aggregate insured obligations (adjusted to reflect the reduced risk on loans or investments guaranteed by federal or state governments) or such other percentage of the aggregate obligations as 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, but it still must ensure that reduced premiums are sufficient to maintain the level of the Insurance Fund at the secure base amount.

B. Operations: The Farm Credit Act sets forth the types of authorized lending activity, persons eligible to borrow, and financial services which can be offered by the Association. The Association is authorized to provide, either directly or in participation with other lenders, credit, credit commitments and related services to eligible borrowers. Eligible borrowers include farmers, ranchers, producers or harvesters of aquatic products, rural residents, and farm-related businesses.

The Association may sell to any System borrowing member, on an optional basis, credit or term life insurance appropriate to protect the loan commitment in the event of death of the debtor(s). The sale of other insurance necessary to protect a member’s farm or aquatic unit is permitted, but limited to hail and multi-peril crop insurance, and insurance necessary to protect the facilities and equipment of aquatic borrowers.

Note 2 — Summary of Significant Accounting Policies

The accounting and reporting policies of the Association conform with 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. Significant estimates are discussed in these footnotes, as applicable. Actual results may differ from these estimates.

Certain amounts in prior years’ financial statements may have been reclassified to conform to the current year’s presentation. Such reclassifications had no effect on net income or total members’ equity of prior years. The Consolidated Financial Statements include the accounts of the FLCA and the PCA. All significant inter-company transactions have been eliminated in consolidation.

Note 1 — Organization and Operations

A. Organization: MidAtlantic Farm Credit, ACA (Association) is a member-owned cooperative which provides credit and credit-related services to or for the benefit of eligible borrowers/stockholders for qualified purposes in the counties of Kent, New Castle and Sussex in the state of Delaware; counties of Baltimore, Caroline, Carroll, Cecil, Dorchester, Frederick, Harford, Howard, Kent, Montgomery, Queen Anne’s, Somerset, Talbot, Washington, Wicomico and Worcester in the state of Maryland; counties of Berks, Bucks, Carbon, Chester, Dauphin, Delaware, Lancaster, Lebanon, Lehigh, Monroe, Montgomery, Northampton, Philadelphia, Pike and Schuylkill in the state of Pennsylvania; and the counties of Accomack, Clarke, Frederick, Northampton, Page, Shenandoah and Warren, in the state of Virginia; and the counties of Berkeley, Jefferson and Morgan, in the state of West Virginia. The Association also has the authority to provide loans to orchardists in all of Puerto Rico, the District of Columbia, and the states of Delaware, Maryland, Pennsylvania, Virginia and West Virginia.

The Association is a lending institution of the Farm Credit System (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 is subject to the provisions of the Farm Credit Act of 1971, as amended (Farm Credit Act). The most recent significant amendment to the Farm Credit Act was the Agricultural Credit Act of 1987. At December 31, 2011, the System was comprised of four Farm Credit Banks, one Agricultural Credit Bank and eighty-four associations.

AgFirst Farm Credit Bank (Bank) and its related associations are collectively referred to as the “District.” The Bank provides funding to associations within the District and is responsible for supervising certain activities of the Association, as well as the other associations operating within the District. The District consists of the Bank and twenty Agricultural Credit Associations (ACAs), all of which are structured as ACA parent-companies, which have two wholly owned subsidiaries, a Federal Land Credit Association (FLCA) and a Production Credit Association (PCA). FLCAs are tax-exempt while ACAs and PCAs are taxable.

ACA parent-companies provide financing and related services through its FLCA and PCA subsidiaries; the PCA is currently inactive. The FLCA makes collateralized long-term agricultural real estate and rural home mortgage loans. The ACA makes short- and intermediate-term loans for agricultural production or operating purposes.

The Farm Credit Administration (FCA) is delegated authority by Congress to regulate the System banks and associations. The FCA examines the activities of the associations and certain actions by the associations are subject to the prior approval of the FCA and the supervising bank.

The Farm Credit Act established the Farm Credit System Insurance Corporation (Insurance Corporation) to administer the Farm Credit Insurance Fund (Insurance Fund). The Insurance Fund is required to be used (1) to ensure the timely payment of principal and

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A. Cash: Cash, as included in the statements of cash flows, represents cash on hand and on deposit at banks.

B. Loans and Allowance for Loan Losses: Long-term real estate mortgage loans generally have original maturities ranging from five to 40 years. Substantially all short- and intermediate-term loans for agricultural production or operating purposes have maturities of 10 years or less. Loans are carried at their principal amount outstanding adjusted for charge-offs and deferred loan fees or costs.

Loans are generally placed in nonaccrual status when principal or interest is delinquent for 90 days (unless adequately collateralized 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) or charged against the allowance for loan losses (if accrued in the prior year).

When loans are in nonaccrual status, the interest portion of payments received in cash is recognized as interest income if collection of the recorded investment in the loan is fully expected and the loan does not have a remaining unrecovered prior charge-off associated with it. Otherwise, loan payments are applied against the recorded investment in the loan. Nonaccrual loans may be returned to accrual status when principal and interest are current, prior charge-offs have been recovered, the ability of the borrower to fulfill the contractual repayment terms is fully expected and the loan is not classified “doubtful” or “loss.” Loans are charged-off, wholly or partially, as appropriate, at the time they are determined to be uncollectible.

In cases where a borrower experiences financial difficulties and the Association makes certain monetary concessions to the borrower through modifications to the contractual terms of the loan, the loan is classified as a restructured loan. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan is classified as a nonaccrual loan.

Loan origination fees and direct loan origination costs are deferred as part of the carrying amount of the loan and the net fee or cost is amortized over the life of the related loan as an adjustment to interest income using the effective interest method.

The allowance for loan losses is a valuation account used to reasonably estimate loan and lease losses existing as of the financial statement date. Determining the appropriate allowance for loan losses balance involves significant judgment about when a loss has been incurred and the amount of that loss.

The Association uses a two-dimensional loan rating model based on an internally generated combined system risk rating guidance that incorporates a 14-point risk rating 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 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 percentage of default probability. The 14-point risk rating scale provides for granularity of the probability of default, especially in the acceptable ratings. There are nine acceptable categories that range from a borrower of the highest quality to a borrower 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 and grows significantly as a loan moves to a substandard (viable) level. A substandard (non-viable) rating indicates that the probability of default is almost certain.

The credit risk rating methodology is a key component of the Association’s allowance for loan losses evaluation, and is generally incorporated into the institution’s loan underwriting standards and internal lending limit. The allowance for loan losses is based on a periodic evaluation of the loan portfolio by management in which numerous factors are considered, including current production and economic conditions, loan portfolio composition, collateral value, portfolio quality, and prior loan loss experience. It is based on estimates, appraisals and evaluations of loans which, by their nature, contain elements of uncertainty and imprecision. The possibility exists that changes in the economy and its impact on borrower repayment capacity will cause these estimates, appraisals and evaluations to change.

The level of allowance for loan losses is generally based on recent charge-off experience adjusted for relevant environmental factors. The Association considers the following factors when adjusting the historical charge-offs experience:

• Changesincreditriskclassifications,

• Changesincollateralvalues,

• Changesinriskconcentrations,

• Changesinweatherrelatedconditions,and

• Changesineconomicconditions.

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. Impaired loans include nonaccrual loans, restructured loans, and could include 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.

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A specific allowance may be established for impaired loans under Financial Accounting Standards Board (FASB) guidance on accounting by creditors for impairment of a loan. Impairment of these loans is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as practically expedient, at the loan’s observable market price or fair value of the collateral if the loan is collateral dependent.

A general allowance may also be established under FASB guidance on accounting for contingencies, to reflect estimated probable credit losses inherent in the remainder of the loan portfolio which excludes impaired loans considered under the specific allowance discussed above. A general allowance can be evaluated on a pool basis for those loans with similar characteristics. The level of the general allowance may be based on management’s best estimate of the likelihood of default adjusted for other relevant factors reflecting the current environment.

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 for loan losses is increased through provisions for loan losses and loan recoveries and is decreased through allowance for loan losses reversals and loan charge-offs.

C. Loans Held for Sale: Certain rural home mortgage loans originated by the Association are sold on a servicing released basis primarily to the Bank or into the secondary market to unrelated third parties. Gains or losses on sales of rural home mortgage loans are recognized based on the difference between the selling price and the carrying value of the related rural home mortgage loans sold.

D. Investments in Other Farm Credit Institutions: Investments in other Farm Credit System institutions are generally nonmarketable investments consisting of stock and participation certificates, allocated surplus, and reciprocal investments in other institutions regulated by the FCA. The Association is required to maintain ownership in the Bank in the form of Class C stock. Accounting for this investment is on the cost plus allocated equities basis.

E. Other Property Owned: Other property owned, consisting of real and personal property acquired through a collection action, is recorded upon acquisition at fair value less estimated selling costs. Revised estimates to the fair value less cost to sell 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, expenses, and carrying value adjustments related to other property owned are included in Gains (losses) on other property owned, net.

F. 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 earnings. Maintenance and repairs are charged to expense and improvements are capitalized.

G. Advanced Conditional Payments: The Association is authorized under the Farm Credit Act to accept advance payments from borrowers. To the extent the borrower’s access to such advance payments is restricted, the advanced conditional payments are netted against the borrower’s related loan balance. Advanced conditional payments are not insured. Interest is generally paid by the Association on such accounts.

H. Employee Benefit Plans: Substantially all employees of the Association may participate in either the AgFirst Farm Credit Final Average Pay Retirement Plan or the AgFirst Farm Credit Cash Balance Plan (collectively referred to as the “Plans”), which are defined benefit plans and considered multi-employer plans. These two Plans are noncontributory and include eligible District employees. The “Projected Unit Credit” actuarial method is used for financial reporting purposes. The actuarially-determined costs of these Plans are allocated to each participating entity, including the Association, by multiplying the Plans’ net pension expense by each institution’s eligible service cost and accumulated benefit obligation as a percentage of the total eligible service cost and total accumulated benefit obligation for all Plans’ participants.

The Association may provide certain health care and life insurance benefits to eligible retired employees (other postretirement benefits) through a District multi-employer plan. Substantially all employees may become eligible for these benefits if they reach early retirement age while working for the Association. Early retirement age is defined as a minimum of age 55 and 10 years of service. Employees hired after December 31, 2002 are required to pay the full cost of their retiree health insurance coverage. Authoritative accounting guidance requires the accrual of the expected cost of providing these benefits to an employee and an employee’s beneficiaries and covered dependents during the years that the employee renders service necessary to become eligible for these benefits. Additional financial information for the plan may be found in Note 10 and in the Notes to the Combined Financial Statements of AgFirst Farm Credit Bank and District Associations’ 2011 Annual Report.

The Association also sponsors single employer supplemental retirement and deferred compensation plans for certain key employees. The plans are nonqualified; therefore, the associated liabilities are included in the Association’s Consolidated Balance Sheets in Other liabilities. See Note 10 for the impact of FASB guidance on employers’ accounting for defined benefit pension and other postretirement plans for the current period for the defined benefit supplemental retirement plan.

Substantially all employees of the Association may also be eligible to participate in a defined contribution Districtwide 401(k) plan, which qualifies as a 401(k) plan as defined by the Internal Revenue Code. For employees hired on or prior to December 31, 2002, the Association contributes $.50 for each $1.00 of the maximum employee contribution of 6 percent of total compensation. For employees hired on or after January 1, 2003, the Association contributes $1.00 for each $1.00 of the maximum employee contribution of 6 percent of total compensation.

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Employee deferrals are not to exceed the maximum deferral as adjusted by the Internal Revenue Service. 401(k) plan costs are expensed as funded.

I. Income Taxes: The Association is generally subject to Federal and certain other income taxes. As previously described, the ACA holding company has two wholly-owned subsidiaries, a PCA and a FLCA. The FLCA subsidiary is exempt from federal and state income taxes as provided in the Farm Credit Act. The ACA holding company and the PCA subsidiary are subject to federal, state and certain other income taxes.

The Association is eligible to operate as a cooperative that qualifies for tax treatment under Subchapter T of the Internal Revenue Code. Accordingly, under specified conditions, the Association 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 taxable earnings that will not be distributed as qualified patronage refunds. The Association distributes patronage on the basis of book income.

The Association accounts for income taxes under the asset and liability method, recognizing deferred tax assets and liabilities for the expected future tax consequences of the temporary differences between the carrying amounts and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled.

The Association records a valuation allowance at the balance sheet dates against that portion of the Association’s deferred tax assets that, based on management’s best estimates of future events and circumstances, more likely than not (a likelihood of more than 50 percent) will not be realized. The consideration of valuation allowances involves various estimates and assumptions as to future taxable earnings, including the effects of our expected patronage program, which reduces taxable earnings.

J. Due from AgFirst Farm Credit Bank: The Association records patronage refunds from the Bank on an accrual basis. The receivable for such patronage refunds is classified as Due from AgFirst Farm Credit Bank.

K. Fair Value Measurement: FASB guidance defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. The 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. This guidance also 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. It describes three levels of inputs that may be used to measure fair value as discussed in Note 13.

L. Recently Issued Accounting Pronouncements: In December 2011, the FASB issued Accounting Standards Update (ASU) 2011-11, “Balance Sheet (Topic 220) - 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 effect 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 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 will not impact the Association’s financial condition or its results of operations, but will result in additional disclosures.

In September 2011, the FASB issued ASU 2011-09, “Compensation (Topic715):RetirementBenefits–MultiemployerPlans.”Theamendment is intended to provide for more information about an employer’s financial obligations to multiemployer pension and other postretirement benefit plans, which should help financial statement users better understand the financial health of significant plans in which the employer participates. The additional disclosures include the following: (1) a description of the nature of plan benefits; (2) a qualitative description of the extent to which the employer could be responsible for the obligations of the plan, including benefits earned by employees during employment with another employer, and (3) other quantitative information to help users understand the financial information about the plan. The amendments are effective for annual periods for fiscal years ending after December 15, 2011 for public entities. The amendments should be applied retrospectively for all prior periods presented. The adoption did not impact the Association’s financial condition or results of operation but did result in additional disclosures (see Note 10).

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” This amendment is intended to increase the prominence of other comprehensive income in financial statements. The current option that permits the presentation of other comprehensive income in the statement of changes in equity has been eliminated. The main provisions of the guidance provides that an entity that reports items of other comprehensive income has the option to present comprehensive income in either one or two consecutive financial statements: (1) A single statement must present the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income; (2) In a two-statement approach, an entity must present the components of net income and total net income in the first statement. That statement must

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be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. With either approach, an entity is required to present reclassification adjustments for items reclassified from other comprehensive income to net income in the statement(s). This guidance is to be applied retrospectively. For public entities, it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance will not impact the Association’s financial condition or results of operations, but will result in changes to the presentation of comprehensive income. In December 2011, the FASB issued guidance (ASU 2011-12; Topic 220) to defer the new requirement to present components of accumulated other comprehensive income reclassified as components of net income on the face of the financial statements. All other requirements in the guidance for comprehensive income are required to be adopted as set forth in the June 2011 guidance. The deferral is effective at the same time the new standard on comprehensive income is adopted.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” The amendments change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments include the following: (1) Application of the highest and best use and valuation premise is only relevant when measuring the fair value of nonfinancial assets (does not apply to financial assets and liabilities); (2) Aligns the fair value measurement of instruments classified within an entity’s shareholders’ equity with the guidance for liabilities. As a result, an entity should measure the fair value of its own equity instruments from the perspective of a market participant that holds the instruments as assets; (3) Clarifies that a reporting entity should disclose quantitative information about the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy; (4) An exception to the requirement for measuring fair value when a reporting entity manages its financial instruments on the basis of its net exposure, rather than its gross exposure, to those risks; (5) Clarifies that the application of premiums and discounts in a fair value measurement is related to the unit of account for the asset or liability being measured at fair value. Premiums or discounts related to size as a characteristic of the entity’s holding (that is, a blockage factor) instead of as a characteristic of the asset or liability (for example, a control premium), are not permitted. A fair value measurement that is not a Level 1 measurement may include premiums or discounts other than blockage factors when market participants would incorporate the premium or discount into the measurement at the level of the unit of account specified in other guidance; (6) Expansion of the disclosures about fair value measurements. The most significant change will require entities, for their recurring Level 3 fair value measurements, to disclose quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a

qualitative discussion about the sensitivity of the measurements. New disclosures are required about the use of a nonfinancial asset measured or disclosed at fair value if its use differs from its highest and best use. In addition, entities must report the level in the fair value hierarchy of assets and liabilities not recorded at fair value but where fair value is disclosed. The amendments are to be applied prospectively. The amendments are effective during interim and annual periods beginning after December 15, 2011. Early application is not permitted. The adoption of this guidance will not impact the Association’s financial condition or results of operations, but will result in additional disclosures.

In April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring,” which provides for clarification on whether a restructuring constitutes a troubled debt restructuring (TDR). In evaluating whether a restructuring is a TDR, a creditor must separately conclude that both of the following exists: (1) the restructuring constitutes a concession, and (2) the debtor is experiencing financial difficulties. The guidance is effective for nonpublic entities, including the District, for annual periods ending on or after December 15, 2012, including interim periods within those annual periods. The guidance should be applied retrospectively to the beginning of the annual period of adoption. The new disclosures about TDR activity required by the guidance on “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” as discussed below, are effective for annual reporting periods ending after December 15, 2011.

In January 2011, the FASB issued ASU 2011-01, “Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings.” This amendment temporarily delayed the effective date of the disclosures about TDRs required by the guidance previously issued on “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The effective date of the new disclosures about TDRs coincides with the guidance for determining what constitutes a TDR as described above. The adoption of this guidance had no material impact on the Association’s financial condition and results of operations but resulted in significant additional disclosures (see Note 3).

In July 2010, the FASB issued ASU 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This amendment provides additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. Existing disclosures were amended to include additional disclosures of financing receivables on both a portfolio segment and class of financing receivable basis. This includes a rollforward schedule of the allowance for credit losses from the beginning of the reporting period to the end of the period on a portfolio segment basis, with the ending balance further disclosed on the basis of the method of impairment (individually or collectively evaluated). The guidance also calls for new disclosures including but not limited to credit quality indicators at the end of the reporting period by class of

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financing receivables, the aging of past due financing receivables, nature and extent of financing receivables modified as troubled debt restructurings by class and the effect on the allowance for credit losses. For public entities, the disclosures as of the end of a reporting period were effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period were effective for interim and annual reporting periods beginning on or after December 15, 2010. The adoption of this guidance had no impact on the Association’s financial condition and results of operations but resulted in significant additional disclosures (see Note 3).

Effective January 1, 2010, the District adopted ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820)” which is intended

to improve disclosures about fair value measurement by increasing transparency in financial reporting. The changes provide a greater level of disaggregated information and more detailed disclosures of valuation techniques and inputs to fair value measurement. The new disclosures and clarification of existing disclosures were effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements. Those disclosures were effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this guidance had no impact on the Association’s financial condition and results of operations but resulted in additional disclosures (see Note 13).

Note 3 — Loans and Allowance for Loan Losses

A summary of loans follows:

December 31,(dollars in thousands) 2011 2010 2009

Real estate mortgage $1,153,432 $1,157,946 $1,136,164Production and intermediate-term 830,302 894,384 934,878Agribusiness

Loans to cooperatives 22,639 48,684 27,320Processing and marketing 44,034 57,552 100,701Farm-related business 72,353 79,354 53,861

Total agribusiness 139,026 185,590 181,882Communication 12,321 8,217 —Energy 4,343 (19) —Rural residential real estate 29,470 33,195 35,420

Total loans $2,168,894 $2,279,313 $2,288,344

The Association may purchase or sell participation interests with other parties in order to diversify risk, manage loan volume, and comply with Farm Credit Administration regulations. The following table presents participations purchased and sold balances at December 31, 2010:

December 31, 2011

Within AgFirst District Within Farm Credit System Outside Farm Credit System Total

Participations Participations Participations Participations Participations Participations Participations Participations (dollars in thousands) Purchased Sold Purchased Sold Purchased Sold Purchased Sold

Real estate mortgage $ — $ 5,582 $ — $ — $ — $ — $ — $ 5,582Production and intermediate term 59,715 129,014 1,977 43,742 52,954 — 114,646 172,756Agribusiness Loans to cooperatives 17,689 — 5,257 — — — 22,946 — Processing and marketing 18,101 — — — 5,556 — 23,657 — Farm-related business 1,306 — 25,643 7,386 3,392 — 30,341 7,386 Total agribusiness 37,096 — 30,900 7,386 8,948 — 76,944 7,386Communication — — 12,367 — — — 12,367 —Energy — — 4,368 — — — 4,368 — Total $96,811 $134,596 $49,612 $51,128 $61,902 $ — $208,325 $185,724

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December 31, 2010

Within AgFirst District Within Farm Credit System Outside Farm Credit System Total

Participations Participations Participations Participations Participations Participations Participations Participations (dollars in thousands) Purchased Sold Purchased Sold Purchased Sold Purchased Sold

Real estate mortgage $ — $ 3,947 $ — $ — $ — $ — $ — $ 3,947Production and intermediate term 65,580 137,328 8,963 45,423 27,150 — 101,693 182,751Agribusiness Loans to cooperatives 12,776 — 31,231 — — — 44,007 — Processing and marketing 31,766 8,231 — 12,284 — — 31,766 20,515 Farm-related business 1,759 624 26,624 4,092 3,536 — 31,919 4,716 Total agribusiness 46,301 8,855 57,855 16,376 3,536 — 107,692 25,231Communication — — 8,263 — — — 8,263 — Total $111,881 $150,130 $75,081 $61,799 $30,686 $ — $217,648 $211,929

A significant source of liquidity for the Association is the repayments and maturities of loans. The following table presents the contractual maturity distribution of loans by loan type at December 31, 2011 and indicates that approximately 18.06 percent of loans had maturities of less than one year:

Due less than Due 1 Through Due after (dollars in thousands) 1 year 5 years 5 years Total

Real estate mortgage $ 31,878 $467,080 $654,474 $1,153,432Production and intermediate term 252,777 376,400 201,125 830,302Agribusiness Loans to cooperatives 21,854 (150) 935 22,639 Processing and marketing 35,455 3,991 4,588 44,034 Farm-related business 32,696 33,171 6,486 72,353 Total agribusiness 90,005 37,012 12,009 139,026Communication 12,157 164 — 12,321Energy 1,345 (16) 3,014 4,343Rural residential real estate 3,549 13,832 12,089 29,470

Total Loans $391,711 $894,472 $882,711 $2,168,894

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2011 2010 2009Real estate mortgage: Acceptable 90.95% 91.27% 88.41%OAEM 4.90 4.55 6.96Substandard/doubtful/loss 4.15 4.18 4.63 100.00% 100.00% 100.00% Production and intermediate-term: Acceptable 86.43% 84.27% 84.44%OAEM 6.78 6.00 7.14Substandard/doubtful/loss 6.79 9.73 8.42 100.00% 100.00% 100.00% Agribusiness: Loans to cooperatives: Acceptable 55.08% 57.82% 91.24% OAEM 44.92 42.18 7.00 Substandard/doubtful/loss 0.00 0.00 1.76 100.00% 100.00% 100.00% Processing and marketing Acceptable 52.82% 75.64% 72.93% OAEM 18.92 0.00 0.06 Substandard/doubtful/loss 28.26 24.36 27.01 100.00% 100.00% 100.00% Farm-related business Acceptable 96.37% 95.62% 91.80% OAEM 2.17 2.40 7.37 Substandard/doubtful/loss 1.46 1.98 0.83 100.00% 100.00% 100.00%

2011 2010 2009Total agribusiness Acceptable 75.91% 79.51% 81.31%

OAEM 14.41 12.09 3.29 Substandard/doubtful/loss 9.68 8.40 15.40 100.00% 100.00% 100.00% Energy and water/ waste disposal: Acceptable 100.00% 100.00% 0.00%OAEM 0.00 0.00 0.00Substandard/doubtful/loss 0.00 0.00 0.00 100.00% 100.00% 0.00% Communication: Acceptable 100.00% 100.00% 100.00%OAEM 0.00 0.00 0.00Substandard/doubtful/loss 0.00 0.00 0.00 100.00% 100.00% 0.00% Rural residential real estate: Acceptable 84.14% 85.63% 90.58%OAEM 4.58 6.10 6.07Substandard/doubtful/loss 11.28 8.27 3.35 100.00% 100.00% 100.00%Total Loans: Acceptable 88.23% 87.52% 86.19%OAEM 6.19 5.74 6.81Substandard/doubtful/loss 5.58 6.74 7.00 100.00% 100.00% 100.00%

The following table shows loans and related accrued interest classified under the Farm Credit Administration Uniform Loan Classification System as a percentage of total loans and related accrued interest receivable by loan type as of December 31, 2011, 2010, and 2009:

The following tables provide an aging analysis of past due loans and related accrued interest as of December 31, 2011 and 2010:

December 31, 2011 Recorded Investment

Not Past Due or 90 Days or More 30 Through 89 90 Days or More Total Less Than Past Due and

(dollars in thousands) Days Past Due Past Due Past Due 30 Days Past Due Total Loans Accruing Interest

Real estate mortgage $ 8,309 $17,516 $25,825 $1,134,600 $1,160,425 $ —Production and intermediate-term 3,379 18,720 22,099 813,006 835,105 —Agribusiness Loans to cooperatives — — — 22,714 22,714 — Processing and marketing — — — 44,078 44,078 — Farm-related business 310 445 755 72,134 72,889 — Total agribusiness 310 445 755 138,926 139,681 —Communication — — — 12,326 12,326 —Energy and water/waste disposal — — — 4,359 4,359 —Rural residential real estate 787 598 1,385 28,206 29,591 — Total $12,785 $37,279 $50,064 $2,131,423 $2,181,487 $ —

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December 31, 2010Recorded Investment

Not Past Due or 90 Days or More 30 Through 89 90 Days or More Total Less Than Past Due and

(dollars in thousands) Days Past Due Past Due Past Due 30 Days Past Due Total Loans Accruing Interest

Real estate mortgage $11,409 $20,009 $31,418 $1,133,512 $1,164,930 $ —Production and intermediate-term 11,107 14,135 25,242 874,155 899,397 —Agribusiness Loans to cooperatives — — — 48,807 48,807 — Processing and marketing — — — 58,009 58,009 — Farm-related business 259 463 722 78,910 79,632 — Total agribusiness 259 463 722 185,726 186,448 —Communication — — — 8,222 8,222 —Energy and water/waste disposal — — — (19) (19) —Rural residential real estate 1,395 776 2,171 31,142 33,313 — Total $24,170 $35,383 $59,553 $2,232,738 $2,292,291 $ —

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.

Nonperforming assets (including related accrued interest) and related credit quality statistics are as follows:

December 31,(dollars in thousands) 2011 2010 2009

Nonaccrual loans:Real estate mortgage $25,572 $29,220 $21,283Production and intermediate-term 29,414 46,861 25,788Agribusiness Loans to cooperatives — — 493 Processing and marketing 12,458 — 36 Farm-related business 428 447 449 Total agribusiness 12,886 447 978Rural residential real estate 1,684 1,437 634Total nonaccrual loans $69,556 $77,965 $48,683

Accruing restructured loans:Real estate mortgage $3,636 $ — $ —Production and intermediate-term 5,610 — —Total accruing restructured loans $9,246 $ — $ —

Accruing loans 90 days or more past due:Real estate mortgage $ — $ 48 $ 659Production and intermediate-term — 38 391Rural residential real estate — 144 194Total accruing loans 90 days or more past due $ — $ 230 $ 1,244

Total nonperforming loans $78,802 $78,195 $49,927Other property owned 1,895 1,338 1,008Total nonperforming assets $80,697 $79,533 $50,935

Nonaccrual loans as a percentage of total loans 3.21% 3.42% 2.13%Nonperforming assets as a percentage of total loans and other property owned 3.72% 3.49% 2.22%Nonperforming assets as a percentage of capital 19.18% 20.06% 13.75%

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The following table presents information relating to impaired loans (including accrued interest) as defined in Note 2:December 31,

(dollars in thousands) 2011 2010 2009

Impaired nonaccrual loans:Current as to principal and interest $30,010 $39,378 $19,896

Past due 39,546 38,587 28,787 Total impaired nonaccrual loans 69,556 77,965 48,683Impaired accrual loans: 90 days or more past due 9,246 230 1,244 Total impaired accrual loans 9,246 230 1,244Total impaired loans $78,802 $78,195 $49,927

Additional impaired loan information is as follows:

December 31, 2011 Year Ended December 31, 2011 Unpaid Interest Income Recorded Principal Related Average Recognized on (dollars in thousands) Investment Balance Allowance Impaired Loans Impaired Loans

Impaired loans with a related allowance for credit losses:Real estate mortgage $ 5,119 $ 5,722 $ 546 $ 6,152 $ 183Production and intermediate-term 5,012 6,876 1,735 6,023 180Agribusiness Processing and marketing 1,405 1,416 — 1,688 50 Farm-related business 332 367 24 399 12

Total Agribusiness 1,737 1,783 24 2,087 62Rural residential real estate 950 1,048 167 1,142 34

Total $12,818 $ 15,429 $2,472 $15,404 $ 459

Impaired loans with no related allowance for credit losses: Real estate mortgage $24,089 $ 31,257 $ — $28,948 $ 862Production and intermediate-term 30,012 59,453 — 36,067 1,074Agribusiness Processing and marketing 11,053 13,252 — 13,283 396 Farm-related business 96 212 — 115 3 Total Agribusiness 11,149 13,464 — 13,398 399Rural residential real estate 734 1,099 — 882 26

Total $65,984 $105,273 $ — $79,295 $2,361

Total impaired loans:Real estate mortgage $29,208 $ 36,979 $ 546 $35,100 $1,045Production and intermediate-term 35,024 66,329 1,735 42,090 1,254Agribusiness Processing and marketing 12,458 14,668 — 14,971 446 Farm-related business 428 579 24 514 15 Total Agribusiness 12,886 15,247 24 15,485 461Rural residential real estate 1,684 2,147 167 2,024 60

Total $78,802 $120,702 $2,472 $94,699 $2,820

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December 31, 2010 Year Ended December 31, 2010 Unpaid Interest Income Recorded Principal Related Average Recognized on (dollars in thousands) Investment Balance Allowance Impaired Loans Impaired Loans

Impaired loans with a related allowance for credit losses:Real estate mortgage $10,500 $ 11,615 $1,851 $10,101 $ 152Production and intermediate-term 29,195 44,447 6,364 28,087 426Agribusiness Farm-related business 20 23 1 20 —Rural residential real estate 436 452 30 419 6

Total $40,151 $ 56,537 $8,246 $38,627 $ 584

Impaired loans with no related allowance for credit losses: Real estate mortgage $18,768 $ 21,343 $ — $18,057 $ 274 Production and intermediate-term 17,704 22,961 — 17,033 257 Agribusiness Farm-related business 427 476 — 411 7Rural residential real estate 1,145 1,517 — 1,101 17

Total $38,044 $ 46,297 $ — $36,602 $ 555

Total impaired loans:Real estate mortgage $29,268 $ 32,958 $1,851 $28,158 $ 426Production and intermediate-term 46,899 67,408 6,364 45,120 683Agribusiness Farm-related business 447 499 1 431 7Rural residential real estate 1,581 1,969 30 1,520 23

Total $78,195 $102,834 $8,246 $75,229 $1,139

Unpaid principal balance represents the contractual principal balance of the loan.

There were no material commitments to lend additional funds to debtors whose loans were classified as impaired at December 31, 2011.

The following table summarizes interest income on nonaccrual and accruing restructured loans that would have been recognized under the original terms of the loans:

Year Ended December 31,(dollars in thousands) 2011 2010 2009

Interest income which would have been recognized under the original loan terms $7,890 $5,506 $3,449

Less: interest income recognized 2,795 978 609

Foregone interest income $5,095 $4,528 $2,840

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A summary of changes in the allowance for loan losses and period end recorded investment in loans is as follows:

December 31, 2011 Energy and Rural

Real Estate Production and Water/Waste Residential (dollars in thousands) Mortgage Intermediate-term Agribusiness Communication Disposal Real Estate Total

Allowance for credit losses:Balance at December 31, 2010 $ 3,481 $ 12,351 $ 1,375 $ 9 $ 20 $ 185 $ 17,421Charge-offs (6,038) (13,239) (2,172) — — (69) (21,518)Recoveries 90 521 — — — 11 622Provision for loan losses 4,767 7,931 1,671 6 2 173 14,550Balance at December 31, 2011 $ 2,300 $ 7,564 $ 874 $ 15 $ 22 $ 300 $ 11,075

December 31, 2011 allowance ending balance: Loans individually evaluated for impairment $ 546 $ 1,735 $ 24 $ — $ — $ 167 $ 2,472 Loans collectively evaluated for impairment $ 1,754 $ 5,829 $ 850 $ 15 $ 22 $ 133 $ 8,603

Recorded investment in loans outstanding:Ending Balance at December 31, 2011 $1,160,425 $ 835,105 $139,681 $12,326 $4,359 $29,591 $2,181,487

December 31. 2011 recorded investment ending balance: Loans individually evaluated for impairment $ 25,572 $ 29,414 $ 12,886 $ — $ — $ 1,684 $ 69,556 Loans collectively evaluated for impairment $1,134,853 $ 805,691 $126,795 $12,326 $4,359 $27,907 $2,111,931

December 31, 2010 Energy and Rural Real Estate Production and Water/Waste Residential (dollars in thousands) Mortgage Intermediate-term Agribusiness Communication Disposal Real Estate Total

Allowance for credit losses:Balance at December 31, 2009 $ 4,321 $ 15,340 $ 1,203 $ — $ — $ 156 $ 21,020Charge-offs (407) (14,964) (63) — — (109) (15,543)Recoveries 64 272 2 — — 6 344Provision for loan losses (497) 11,703 233 9 20 132 11,600Balance at December 31, 2010 $ 3,481 $ 12,351 $ 1,375 $ 9 $ 20 $ 185 $ 17,421

December 31, 2010 allowance ending balance: Loans individually evaluated for impairment $ 1,829 $ 6,386 $ 1 $ — $ — $ 30 $ 8,246 Loans collectively evaluated for impairment $ 1,652 $ 5,965 $ 1,374 $ 9 $ 20 $ 155 $ 9,175

Recorded investment in loans outstanding:Ending Balance at December 31, 2010 $1,164,930 $899,397 $186,448 $ 8,222 $ (19) $33,313 $2,292,291

December 31, 2010 recorded investment ending balance: Loans individually evaluated for impairment $ 29,220 $ 46,861 $ 447 $ — $ — $ 1,437 $ 77,965 Loans collectively evaluated for impairment $1,135,710 $852,536 $186,001 $ 8,222 $ (19) $31,876 $2,214,326

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To mitigate risk of loan losses, the Association has entered into Long-Term Standby Commitments to Purchase agreements with the Federal Agricultural Mortgage Corporation (Farmer Mac). The agreements, which are effectively credit guarantees that will remain in place until the loans are paid in full, give the Association the right to sell the loans identified in the agreements to Farmer Mac in the event of default (typically four months past due), subject to certain conditions. The balance of loans under Long-Term Standby Commitments to Purchase held by the Association was $5.0 million, $7.0 million, and $11.2 million at December 31, 2011, 2010, and 2009, respectively. Fees paid to Farmer Mac for such commitments totaled $35 thousand, $52 thousand, and $69 thousand for 2011, 2010, and 2009, respectively.

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. The following table presents additional information regarding troubled debt restructurings as of the restructuring date that occurred during the year ended December 31, 2011. The table does not include purchased credit impaired loans.

Pre-modification Outstanding Recorded Investment

Interest Principal Other (dollars in thousands) Concessions Concessions Concessions Total

Troubled debt restructurings:Real estate mortgage $177 $ 7,298 $ — $ 7,475Production and intermediate-term — 32,358 7,587 39,945Agribusiness

Processing and marketing — 8,996 — 8,996 Total agribusiness — 8,996 — 8,996Rural residential real estate — 249 — 249

Total $177 $48,901 $7,587 $56,665

Post-modification Outstanding Recorded Investment Effects of Modification Interest Principal Other (dollars in thousands) Concessions Concessions Concessions Total Provisions Charge-offs

Troubled debt restructurings:Real estate mortgage $176 $ 7,325 $ — $ 7,501 $1,756 $ (1,756)Production and intermediate-term — 32,359 5,297 37,656 4,843 (8,635)Agribusiness

Processing and marketing — 8,996 — 8,996 1,134 (1,134) Total agribusiness — 8,996 — 8,996 1,134 (1,134)Rural residential real estate — 249 — 249 — — Total $176 $48,929 $5,297 $54,402 $7,733 $(11,525)

Interest concessions include interest forgiveness and interest deferment. Principal concessions include principal forgiveness, principal deferment, and maturity extensions. Other concessions include additional compensation received which might be in the form of cash or other assets.

The following table presents information regarding troubled debt restructurings (TDRs) that occurred during the year ended December 31, 2011 and for which there was a subsequent payment default during this same period. Payment default is defined as a payment that was thirty days or more past due.

Outstanding Recorded Investment at (dollars in thousands) December 31, 2011

Defaulted troubled debt restructurings: Real estate mortgage $ 170Production and intermediate-term 4,425Agribusiness Processing and marketing — Total agribusiness —Rural residential real estate —

Total $4,595

TDRs outstanding at December 31, 2011 totaled $29.4 million, of which $20.2 million were in nonaccrual status.

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Note 4 — Investment in Other Farm Credit Institutions

Investments in other Farm Credit System institutions are generally nonmarketable investments consisting of stock and participation certificates, allocated surplus, and reciprocal investments in other institutions regulated by the FCA. The Association is required to maintain ownership in the Bank in the form of Class C stock. Accounting for this investment is on the cost plus allocated equities basis. The Association’s investment in the Bank totaled $33,795 for 2011, $34,393 for 2010 and $30,344 for 2009.

Note 5 — Premises and Equipment

Premises and equipment consist of the following:

December 31, 2011 2010 2009

Land $ 2,489 $ 2,475 $ 2,434

Buildings and improvements 13,951 13,931 13,896

Furniture and equipment 6,543 6,454 6,244

22,983 22,860 22,574

Less: accumulated depreciation 9,547 9,068 8,229

Total $13,436 $13,792 $14,345

Note 6 — Other Property Owned

Net gains (losses) on other property owned consist of the following:

December 31, 2011 2010 2009

Gains (losses) on sale, net $ (208) $ (71) $ (12)Carrying value unrealized gains (losses) (759) (126) —Operating income (expense), net (74) (72) (8)Gains (losses) on other property owned, net $(1,041) $ (269) $ (20)

Note 7 — Notes Payable to AgFirst Farm Credit Bank

The Association’s indebtedness to the Bank represents borrowings by the Association to fund its loan portfolio. This indebtedness is collateralized by a pledge of substantially all of the Association’s assets and the terms of the revolving lines of credit are governed by a general financing agreement. Interest rates on both variable and fixed rate notes payable are generally established loan-by-loan based on the Bank’s marginal cost of funds, capital position, operating costs and return objectives. The interest rate is periodically adjusted by the Bank based upon agreement between the Bank and the Association. The weighted average interest rates on the variable rate notes were 1.58 percent for LIBOR-based loans, 1.69 percent for Prime-based loans, and the weighted average remaining maturities were 2.8 years and 5.7 years, respectively, at December 31, 2011. The weighted average interest rate on the fixed rate and adjustable rate mortgage (ARM) notes which are match funded by the Bank was 2.94 percent and the weighted average remaining maturity was 6.3 years at December 31, 2011. The weighted average interest rate on

all interest-bearing notes payable was 2.74 percent and the weighted average remaining maturity was 5.9 years at December 31, 2011.

Variable rate and fixed rate notes payable represent approximately 6.93 percent and 93.07 percent, respectively, of total notes payable at December 31, 2011.

Under the Farm Credit Act, the Association is obligated to borrow only from the Bank, unless the Bank approves borrowing from other funding sources. The Bank, consistent with FCA regulations, has established limitations on the Association’s ability to borrow funds based on specified factors or formulas relating primarily to credit quality and financial condition. At December 31, 2011, the Association’s notes payable were within the specified limitations.

The Association has a net settlement Agreement with CoBank, ACB to settle transactions between the two institutions daily to an aggregate line of credit of $30 million.

Note 8 — Members’ Equity

A description of the Association’s capitalization requirements, protection mechanisms, regulatory capitalization requirements and restrictions, and equities are provided below.

A. Capital Stock and Participation Certificates

In accordance with the Farm Credit Act and the Association’s capitalization bylaws, each borrower is required to invest in Class C stock for agricultural loans, or Class C participation certificates in the case of rural home and farm related business loans, as a condition of borrowing. The initial borrower investment, through either purchase or transfer, must equal two percent of the loan amount or one thousand dollars, whichever is less. The Association’s Board of Directors may increase the amount of investment if necessary to meet the Association’s capital needs. Loans designated for sale or sold into the Secondary Market on or after April 16, 1996 have no voting stock or participation certificate purchase requirement if sold within 180 days following the date of designation.

The borrower acquires ownership of the capital stock or participation certificates at the time the loan is made, usually as part of the loan proceeds and not as a cash investment. The aggregate par value is generally added to the principal amount of the related loan obligation. The Association retains a first lien on the stock or participation certificates owned by borrowers.Retirement of such equities will generally 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.

B. Regulatory Capitalization Requirements and Restrictions

The FCA’s capital adequacy regulations require all System institutions to achieve permanent capital of 7.00 percent of risk-adjusted assets and off-balance-sheet commitments. Failure to meet the 7.00 percent capital requirement can initiate certain mandatory and possibly additional discretionary actions by FCA that, if undertaken, could have a direct material effect on the

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Association’s financial statements. The Association is prohibited from reducing permanent capital by retiring stock or making certain other distributions to shareholders unless prescribed capital standards are met. The FCA regulations also require that additional minimum standards for capital be achieved. These standards require all System institutions to achieve and maintain ratios as defined by FCA regulations. These required ratios are total surplus as a percentage of risk-adjusted assets of 7.00 percent and of core surplus as a percentage of risk-adjusted assets of 3.50 percent. The Association’s permanent capital, total surplus and core surplus ratios at December 31, 2011 were 16.57 percent, 16.19 percent and 16.00 percent, respectively.

An FCA regulation empowers it to direct a transfer of funds or equities by one or more System institutions to another System institution under specified circumstances. The Association has not been called upon to initiate any transfers and is not aware of any proposed action under this regulation.

C. Description of Equities

The Association is authorized to issue or have outstanding Classes A, C, D and E Common Stock, Class C Participation Certificates and such other classes of equity as may be provided for in amendments to the bylaws in such amounts as may be necessary to conduct the Association’s business. All stock and participation certificates have a par or face value of five dollars ($5.00) per share.

The Association had the following shares outstanding at December 31, 2011:

Shares Outstanding AggregateClass Protected Number Par Value

C Common/Voting No 1,752,569 $8,763C Participation Certificates/ Nonvoting No 136,152 681Total Capital Stock and Participation Certificates 1,888,721 $9,444

At-risk common stock and participation certificates are retired at the sole discretion of the Association’s Board of Directors at book value not to exceed par or face amounts, provided the minimum capital adequacy standards established by the Board are met.

Retained Earnings

The Association maintains unallocated and allocated retained earnings accounts. The minimum aggregate amount of these two accounts is determined by the Association’s Board of Directors. At the end of any fiscal year, if the retained earnings accounts would be less than the minimum amount deemed necessary to maintain adequate capital reserves to meet the commitments of the Association, earnings for the year shall be applied to the unallocated retained earnings account in such amounts deemed necessary by the Association’s Board of Directors. Unallocated retained earnings are maintained for each borrower to permit liquidation on a patronage basis.

The Association maintains an allocated retained earnings account consisting of earnings held and allocated to borrowers on a patronage basis. In the event of a net loss for any fiscal year, such allocated retained earnings account will be subject to full impairment in the order specified in the bylaws beginning with the most recent allocation.

The Association has a first lien and security interest on all surplus account allocations owned by any borrowers, and all distributions thereof, as additional collateral for their indebtedness to the Association. When the debt of a borrower is in default or is in the process of final liquidation by payment or otherwise, the Association, upon approval of the Board of Directors, may order any and all surplus account allocations owned by such borrower to be applied against the indebtedness.

Allocated equities shall be retired solely at the discretion of the Board of Directors, provided that minimum capital standards established by the FCA and the Board are met. Nonqualified retained equity is considered to be permanently invested in the Association and there is no plan to revolve or retire this surplus. All nonqualified distributions are tax deductible only when redeemed.

At December 31, 2011, allocated members’ equity consisted of $8,508 of qualified surplus, $100,017 of nonqualified allocated surplus and $99,356 of nonqualified retained surplus.

Dividends

The Association may declare noncumulative dividends on its capital stock and participation certificates provided the dividend rate does not exceed eight percent (8%) of the par value of the respective capital stock and participation certificates.

The rate of dividends paid on Classes A, C, D and E Common Stock and Class C Participation Certificates shall be at the same rate per share.

Dividends may not be declared if, after recording the liability, the Association would not meet its capital adequacy standards.

Patronage Distributions

Prior to the beginning of any fiscal year, the Board of Directors, by adoption of a resolution, may obligate the Association to distribute to borrowers on a patronage basis all or any portion of available net earnings for each fiscal year. Patronage distributions are based on the proportion of the borrower’s interest to the amount of interest earned by the Association on its total loans unless another proportionate patronage basis is approved by the Board.

If the Association meets its capital adequacy standards after making the patronage distributions, the patronage distributions may be in cash, authorized stock of the Association, allocations of earnings retained in an allocated members’ equity account, or any one or more of such forms of distribution. Patronage distributions of the Association’s earnings may be paid on either a qualified or nonqualified basis, or a combination of both, as determined by the Board of Directors. A minimum of 20 percent of the total qualified

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patronage distribution to any borrower for any fiscal year shall always be paid in cash.

Transfer

Classes A, C, D and E Common Stocks, and Class C Participation Certificates may be transferred to persons or entities eligible to purchase or hold such equities.

Impairment

Any net losses recorded by the Association shall first be applied against unallocated members’ equity. To the extent that such losses would exceed unallocated members’ equity, such losses would be applied consistent with the Association’s bylaws and shall be borne ratably by each share of Class A, C, D and E Common Stock and Class C Participation Certificates outstanding.

Impaired stock and participation certificates shall be restored in the reverse of the impairment sequence until each share of stock and participation certificates has a book value equal to its par or face value, respectively.

Liquidation

In the event of liquidation or dissolution of the Association, any assets of the Association remaining after payment or retirement of all liabilities and payment of all accrued but unpaid dividends shall be distributed to the holders of the outstanding stock and participation certificates in the following order of priority:

First, to the holders of Class A Common, Class C Common, Class D Common Stock, Class E Common Stock, Participation Certificates pro rata in proportion to the number of shares or units of each such class of stock or participation certificates then issued and outstanding, until an amount equal to the aggregate par value or face amount of all such shares or units has been distributed to such holders;

Second, to the holders of allocated surplus evidenced by qualified written notices of allocation, in the order of year of issuance and pro rata by year of issuance, until the total amount of such allocated surplus has been distributed;

Third, to the holders of allocated surplus evidenced by nonqualified written notices of allocation, in the order of year of issuance and pro rata by year of issuance, until the total amount of such allocated surplus has been distributed; and

Fourth, insofar as is practicable, any remaining assets shall be distributed to past and present Patrons on a patronage basis in a fair and equitable manner determined by the Board or receiver.

D. Other Comprehensive Income (Loss)

The Association reports other comprehensive income (loss) (OCI) in its consolidated statements of changes in members’ equity. The Association reported OCI of $(106), $9, and $(18) in 2011, 2010, and 2009, respectively, due to FASB guidance on employers’ accounting for defined benefit pension and other postretirement plans (see Note 10 for further information).

Note 9 — Income Taxes

The provision (benefit) for income taxes follows:

Year Ended December 31, 2011 2010 2009

Current:

Federal $ (537) $ (69) $ 724 State — (7) 137

(537) (76) 861 Deferred: Federal — — — State — — —

— — —Total provision (benefit) for income taxes $ (537) $ (76) $ 861

The provision (benefit) 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:

December 31, 2011 2010 2009

Federal tax at statutory rate $ 15,176 $ 17,060 $11,278State tax, net — (5) 92

Patronage distributions (3,400) (3,400) (2,720)

Tax-exempt FLCA earnings (10,936) (14,415) (8,949)Change in deferred tax asset valuation allowance (1,315) 706 236

Other (62) (22) 924Provision (benefit) for income taxes $ (537) $ (76) $ 861

Deferred tax assets and liabilities are comprised of the following at:

December 31, 2011 2010 2009

Deferred income tax assets: Allowance for loan losses $ 3,118 $ 4,580 $ 4,795 Netoperatingloss–carryforward 653 128 128 Nonaccrual loan interest 1,500 2,260 1,094 Other 275 216 140Gross deferred tax assets 5,546 7,184 6,157Less: valuation allowance (2,535) (3,850) (3,144)Gross deferred tax assets, net of valuation allowance 3,011 3,334 3,013

Deferred income tax liabilities: Bank patronage allocation (2,750) (3,178) (2,927) Loan fees (262) (154) (84) Other 1 (2) (2)

Gross deferred tax liability (3,011) (3,334) (3,013)

Net deferred tax asset $ — $ — $ —

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pension plans, the AgFirst Farm Credit Retirement Plan which is a final average pay plan (FAP) and the AgFirst Farm Credit Cash Balance Retirement Plan which is a cash balance plan (CB). In addition, the Association participates in a multiemployer defined benefit other postretirement benefits plan (OPEB), the Farm Credit Benefits Alliance Retiree and Disabled Medical and Dental Plan and a defined contribution 401(k) plan. The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects:

a) Assets contributed to multiemployer plans by one employer may be used to provide benefits to employees of other participating employers.

b) If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.

c) If the Association chooses to stop participating in some of its multiemployer plans, the Association may be required to contribute to eliminate the underfunded status of the plan.

At December 31, 2011, deferred income taxes have not been provided by the Association on approximately $17.8 million of patronage refunds received from the Bank prior to January 1, 1993. Such refunds, distributed in the form of stock, are subject to tax only upon conversion to cash. The tax liability related to future conversions is not expected to be material.

The Association recorded a valuation allowance of $2,535, $3,850 and $3,144 during 2011, 2010 and 2009, respectively. The Association will continue to evaluate the realizability of these deferred tax assets and adjust the valuation allowance accordingly.

There were no uncertain tax positions identified related to the current year and the Association has no unrecognized tax benefits at December 31, 2011 for which liabilities have been established. The Association recognizes interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense. The tax years that remain open for federal and major state income tax jurisdictions are 2008 and forward.

Note 10 — Employee Benefit Plans

The Association participates in four District sponsored benefit plans. These plans include two multiemployer defined benefit

The Association’s participation in the multiemployer defined benefit plans for the annual period ended December 31, 2011, 2010 and 2009 is outlined in the table below. The “Percentage Funded to Projected Benefit Obligation” or “Percentage Funded to Accumulated Postretirement Benefit Obligation” represents the funded amount for the entire plan and the “Contributions” and “Percentage of Total Contributions” columns represent the Association’s respective amounts.

Percentage Funded to Percentage of Pension Plan Projected Benefit Obligation Contributions Total Contributions 2011 2010 2009 2011 2010 2009 2011 2010 2009

AgFirst Farm Credit Retirement Plan 74.82% 75.75% 71.65% $4,161 $4,101 $4,710 10.49% 9.95% 10.03%AgFirst Farm Credit Cash Balance Retirement Plan 81.77% 115.95% 145.01% $57 $33 $66 6.86% 7.09% 7.56%

Other Postretirement Percentage Funded to Accumulated Percentage of Benefit Plans Postretirement Benefit Obligation Contributions Total Contributions 2011 2010 2009 2011 2010 2009 2011 2010 2009

Farm Credit Benefits Alliance Retiree and Disabled Medical and Dental Plans 0.00% 0.00% 0.00% $ 419 $ 424 $ 410 7.03% 7.22% 7.12%

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The District’s multiemployer plans are not subject to ERISA and no Form 5500 is required. As such, the following information is neither available for nor applicable to the plans:

1. The Employee Identification Number (EIN) and three-digit Pension Plan Number.

2. The most recent Pension Protection Act (PPA) zone status. Among other factors, plans in the red zone are generally less than 65 percent funded, plans in the yellow zone are less than 80 percent funded, and plans in the green zone are at least 80 percent funded.

3. The “FIP/RP Status” indicating whether a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented.

4. The expiration date(s) of collective-bargaining agreement(s).

Substantially all employees of the Association are eligible to participate in either the FAP Plan or the CB Plan. These two Plans are noncontributory and include eligible Association and other District employees. For participants hired prior to January 1, 2003, benefits are provided under the FAP Plan and are based on eligible compensation and years of service. For participants hired on or after January 1, 2003, benefits are provided under the CB Plan and are determined using a percent of eligible compensation formula. The employer contribution into the CB Plan is based on a formula of 3.00-5.00 percent of eligible compensation (depending on years of service) and interest credits as allocated to an employee’s theoretical account balance. The actuarially-determined costs of these plans are allocated to each participating entity, including the Association, by multiplying the plans’ net pension expense by each institution’s eligible service cost and accumulated benefit obligation as a percentage of the total eligible service cost and total accumulated benefit obligation for all plan participants. Plan expenses included in employee benefit costs were $5,461 for 2011, $4,973 for 2010, and $5,959 for 2009. The cumulative excess of amounts funded by the Association over the cost allocated to the Association is reflected as prepaid retirement expense, a component of Other Assets in the Consolidated Balance Sheets.

In addition to providing pension benefits, the Association provides certain medical and dental benefits for eligible retired employees through the OPEB Plan. Substantially all of the Association employees may become eligible for the benefits if they reach early retirement age while working for the Association. Early retirement age is defined as a minimum of age 55 and 10 years of service. Employees hired after December 31, 2002, and employees who separate from service between age 50 and age 55, are required to pay the full cost of their retiree health insurance coverage. Employees who retire subsequent to December 1, 2007 are no longer provided retiree life insurance

benefits. Certain Association charges related to this plan are an allocation of District charges based on the Association’s proportional share of the plan liability. This plan is unfunded with expenses paid as incurred. Postretirement benefits other than pensions included in employee benefit costs were $911 for 2011, $764 for 2010, and $804 for 2009. The cumulative excess of cost allocated to the Association over the amounts funded by the Association is reflected as postretirement benefits other than pensions, a component of other liabilities in the Association’s Consolidated Balance Sheets.

The Association also participates in the defined contribution Farm Credit Benefit Alliance (FCBA) 401(k) Plan (401(k) Plan), which qualifies as a 401(k) plan as defined by the Internal Revenue Code. For employees hired on or prior to December 31, 2002, the Association contributes $0.50 for each $1.00 of the employee’s first 6.00 percent of contribution (based on total compensation) up to the maximum employer contribution of 3.00 percent of total compensation. For employees hired on or after January 1, 2003, the Association contributes $1.00 for each $1.00 of the employee’s first 6.00 percent of contribution up to the maximum employer contribution of 6.00 percent of total compensation. Employee deferrals are not to exceed the maximum deferral as determined and adjusted by the Internal Revenue Service. The 401(k) Plan costs are expensed as funded. Employer contributions to this plan included in salaries and employee benefit costs were $511, $493, and $470 for the years ended December 31, 2011, 2010, and 2009, respectively.

FASB guidance further requires the determination of the fair value of plan assets and recognition of actuarial gains and losses, prior service costs or credits, and transition assets or obligations as a component of AOCI. Under the guidance, these amounts are subsequently recognized as components of net periodic benefit costs over time. For 2011, 2010, and 2009, $(106), $9 and $(18), respectively, have been recognized as a net debit, credit and debit, respectively, to AOCI to reflect these elements.

The Association also sponsors single employer supplemental retirement and deferred compensation plans for certain key employees. The plans are nonqualified; therefore, the associated liabilities are included in the Association’s Consolidated Balance Sheets in Other liabilities. Net periodic pension cost for 2011 was $124. Assets have been allocated and separately invested for these plans, but are not isolated from the general creditors of the Association. Accordingly, the supplemental retirement plan is considered to be unfunded and had a projected benefit obligation of $1,102 and a net under-funded status of $1,102 at December 31, 2011. Assumptions used to determine the projected benefit obligation as of December 31, 2011 included a discount rate of 5.20 percent and a rate of compensation increase of 4.50 percent.

Additional financial information for the four District sponsored multi-employer plans may be found in the Notes to the Combined Financial Statements of AgFirst Farm Credit Bank and District Associations’ 2011 Annual Report.

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The Association 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. At December 31, 2011, the Association had outstanding $10,324 of standby letters of credit, with expiration dates ranging from December 31, 2011 to September 30, 2014. The maximum potential amount of future payments the Association may be required to make under these existing guarantees is $10,324.

A guarantor is required to recognize at the inception of a guarantee, a liability for the fair value of the guarantee commitment. The Association has determined the fair value of the guarantee commitment based upon the fees to be earned over the life of the guarantee. The fair value is updated periodically to reflect changes in individual guarantee amounts and the remaining life to maturity of the individual guarantees in the Association’s inventory. At December 31, 2011, the Association’s inventory of standby letters of credit had a fair value of $99 and was included in other liabilities.

Note 13 — Fair Value Measurement

FASB guidance defines fair value, establishes a framework for measuring fair value and requires disclosures about fair values for certain assets and liabilities measured at fair value on a recurring and non-recurring basis. These assets and liabilities consist primarily of assets held in trust funds, standby letters of credit, impaired loans, and other property owned.

This 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.

This guidance establishes a fair value hierarchy for disclosure of fair value measurements to maximize the use of observable inputs, that is, inputs that reflect the assumptions market participants would use in pricing an asset or liability based on market data obtained from sources independent of the reporting entity. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The three levels of inputs and the classification of the Association’s financial instruments within the fair value hierarchy are as follows:

Note 11 — Related Party Transactions

In the ordinary course of business, the Association enters into loan transactions with officers and directors of the Association, their immediate families and other organizations with which such persons may be associated. Such loans are subject to special approval requirements contained in the FCA regulations and are made on the same terms, including interest rates, amortization schedule, and collateral, as those prevailing at the time for comparable transactions with unaffiliated borrowers.

Total loans to such persons at December 31, 2011 amounted to $24,393. During 2011, $6,009 of new loans were made and repayments totaled $6,233. In the opinion of management, none of these loans outstanding at December 31, 2011 involved more than a normal risk of collectibility.

Note 12 — Commitments and Contingencies

The Association has various commitments outstanding and contingent liabilities.

The Association may participate in financial instruments with off-balance-sheet risk to satisfy the financing needs of its borrowers 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 borrower 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, 2011, $437,879 of commitments to extend credit and $5,084 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 Consolidated Balance Sheets until funded or drawn upon. The credit risk associated with issuing commitments and letters of credit 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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Level 1

Level 1 inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets. The Association’s Level 1 assets at December 31, 2011 consist of assets held in trust funds related to deferred compensation and supplemental retirement plans. The trust funds include investments in securities that are actively traded and have quoted net asset value prices that are directly observable in the marketplace.

Level 2

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets; quoted prices in markets that are not active; and inputs that are observable, or can be corroborated, for substantially the full term of the asset or liability. The Association has no Level 2 assets or liabilities measured at fair value on a recurring basis at December 31, 2011.

Level 3

Level 3 inputs to the valuation methodology are unobservable and supported by little or no market activity. Valuation is determined using pricing models, discounted cash flow methodologies, or similar techniques, and could include significant management judgment or estimation. Level 3 assets and liabilities also could include instruments whose price has been adjusted based on dealer quoted pricing that is different than the third-party valuation or internal model pricing.

Level 3 assets at December 31, 2011 include impaired loans which represent the fair value of certain loans that were evaluated for impairment under FASB guidance. The fair value was based upon the underlying collateral since these were collateral-dependent loans. The fair value measurement process uses independent 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 collateral, less estimated costs to sell, is less than the principal balance of the loan, a specific reserve is established. Other property owned is classified as a Level 3 asset at December 31, 2011. The fair value for other property owned is based upon the collateral value. Costs to sell represent transaction costs and are not included as a component of the fair value of other property owned. Level 3 liabilities at December 31, 2011 include standby letters of credit whose market value is internally calculated based on information that is not observable either directly or indirectly in the marketplace.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the assets and liabilities that are measured at fair value on a recurring basis at December 31, 2011, 2010, and 2009 for each of the fair value hierarchy levels:

December 31, 2011Total

Level 1 Level 2 Level 3 Fair Value

Assets:Assets held in

trust funds $808 $ — $ — $808 Total Assets $808 $ — $ — $808

Liabilities: Standby letters of credit $ — $ — $ 99 $ 99 Total Liabilities $ — $ — $ 99 $ 99





Liabilities: Standby letters of credit $ — $ — $206 $206 Total Liabilities $ — $ — $206 $206





Liabilities: Standby letters of credit $ — $ — $322 $322 Total Liabilities $ — $ — $322 $322

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Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2011 and 2010 for each of the fair value hierarchy values are summarized below.

December 31, 2011 Total YTD Total

Fair Gains Level 1 Level 2 Level 3 Value (Losses)

Assets:Impaired loans $ — $ — $11,073 $11,073 $(15,122)Other property

owned $ — $ — $ 2,023 $ 2,023 $ (967)



Assets:Impaired loans $ — $ — $31,917 $31,917 $(14,414)Other property

owned $ — $ — $ 1,207 $ 1,207 $ (197)



Assets:Impaired loans $ — $ — $19,027 $19,027 $ (8,217)

Other property owned $ — $ — $ 1,008 $ 1,008 $ (12)

The Association had no transfers of assets or liabilities into or out of Level 1 or Level 2 during 2011, 2010, or 2009. The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis:

Standby Letters Of Credit

Balance at January 1, 2011 $206Total gains or (losses) realized/unrealized:

Included in earnings —Included in other comprehensive loss —

Purchases, sales, issuances and settlements, net (107)Transfers in and/or out of Level 3 —Balance at December 31, 2010 $ 99




Purchases, sales, issuances and settlements, net (116)Transfers in and/or out of Level 3 —Balance at December 31, 2010 $206




Purchases, sales, issuances and settlements, net 24Transfers in and/or out of Level 3 —Balance at December 31, 2009 $322

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Note 14 — Disclosures About Fair Value of Financial Instruments

The following table presents the carrying amounts and fair values of the Association’s financial instruments at December 31, 2011, 2009 and 2008.

Quoted market prices are generally not available for certain System financial instruments, as described below. Accordingly fair values are based on judgments regarding anticipated cash flows, 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 estimated fair values of the Association’s financial instruments are as follows:

December 31, 2011Carrying Estimated

Amount Fair Value

Financial assets:Cash $ 3,238 $ 3,238Loans, net of allowance $2,157,819 $2,182,808

Accrued interest receivable $ 12,593 $ 12,593 Assets held in trust funds $ 808 $ 808

Financial liabilities: Notes payable to AgFirst Farm Credit Bank $1,788,974 $1,805,109

December 31, 2010 Carrying Estimated Amount Fair Value

Financial assets: Cash $ 5,316 $ 5,316 Loans, net of allowance $2,261,892 $2,267,222 Accrued interest receivable $ 12,978 $ 12,978 Assets held in trust funds $ 683 $ 683


December 31, 2009 Carrying Estimated Amount Fair Value

Financial assets:Cash $ 1,651 $ 1,651Loans, net of allowance $2,267,324 $2,296,240Accrued interest receivable $ 13,725 $ 13,725

Assets held in trust funds $ 519 $ 519


A description of the methods and assumptions used to estimate the fair value of each class of the Association’s financial instruments for which it is practicable to estimate that value follows:

A. Cash: The carrying value is primarily a reasonable estimate of fair value.

B. Loans: Because no active market exists for the Association’s loans, fair value is estimated by discounting the expected future cash flows using the Association’s current interest rates at which similar loans would be made to borrowers with similar credit risk. Discount rates are based on the Bank’s loan rates as well as management estimates.

For purposes of determining fair value of accruing loans, the loan portfolio is segregated into pools of loans with homogeneous characteristics based upon repricing and credit risk. Expected future cash flows and interest rates reflecting appropriate credit risk are separately determined for each individual pool.

Fair value of loans in a nonaccrual status is estimated to be the carrying amount of the loan less specific reserves.

C. Accrued Interest Receivable: The carrying value of accrued interest approximates its fair value.

D. Investment in Other Farm Credit Institutions: Estimating the fair value of the Association’s investment in the Bank is not practicable because the stock is not traded. As described in Note 4, the net investment is a requirement of borrowing from the Bank and is carried at cost plus allocated equities in the accompanying Consolidated Balance Sheets. The Association owns 9.60 percent of the issued stock of the Bank as of December 31, 2011 net of any reciprocal investment. As of that date, the Bank’s assets totaled $29.6 billion and shareholders’ equity totaled $2.1 billion. The Bank’s earnings were $385 million during 2011.

In addition, the Association has an investment of $718 related to other Farm Credit institutions.

E. Notes Payable to AgFirst Farm Credit Bank: The notes payable are segregated into pricing pools according to the types and terms of the loans (or other assets) which they fund. Fair value of the notes payable is estimated by discounting the anticipated cash flows of each pricing pool using the current rate that would be charged for additional borrowings. For purposes of this estimate it is assumed the cash flow on the notes is equal to the principal payments on the Association’s loan receivables plus accrued interest on the notes payable. This assumption implies that earnings on the Association’s interest margin are used to fund operating expenses and capital expenditures.

F. Commitments to Extend Credit: The estimated market value of off-balance-sheet commitments is minimal since the committed rate approximates current rates offered for commitments with similar rate and maturity characteristics and since the related credit risk is not significant.

G. Assets Held in Trust Funds: See Note 13 for discussion of estimation of fair value for this instrument.

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MidASenior Management T

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MidA(beloFred R. MVice Chairman; M. W

Note 15 — Quarterly Financial Information (Unaudited)

Quarterly results of operations for the years ended December 31, 2011, 2010 and 2009 follow:

2011 First Second Third Fourth Total

Net interest income $ 16,792 $16,666 $17,660 $17,681 $ 68,799Provision for (reversal of allowance for) loan losses 2,000 4,000 6,000 2,550 14,550Noninterest income (expense), net (3,967) (2,367) (2,827) 83 (9,078)Net income $ 10,825 $10,299 $8,833 $15,214 $ 45,171


Net interest income $15,236 $15,356 $15,779 $16,705 $ 63,076Provision for (reversal of allowance for) loan losses 2,000 3,200 1,000 5,400 11,600

Noninterest income (expense), net 521 (1,250) (1,830) 1,337 (1,222)

Net income $13,757 $10,906 $12,949 $12,642 $ 50,254


Net interest income $13,333 $14,002 $14,307 $15,368 $ 57,010Provision for (reversal of allowance for) loan losses 2,000 2,500 4,500 2,700 11,700Noninterest income (expense), net (4,680) (3,921) (3,024) (1,376) (13,001)Net income $ 6,653 $ 7,581 $ 6,783 $11,292 $ 32,309

Note 16 – Subsequent Events

The Association has evaluated subsequent events and has determined there are none requiring disclosure through March 13, 2012, which is the date the financial statements were issued.

MidA(aboSan

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MidAtlantic Farm Credit’s Board of Directors and Senior Management Team

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MidAtlantic Farm Credit’s Board of Directors(below, left to right): Paul D. Baumgardner; T. Jeffery Jennings; Dale J. Ockels; Christopher J. Kurtzman; Ralph L. Robertson; Fred R. Moore, Jr.; Lingan T. Spicer; Brian L. Boyd; Deborah A. Benner; Dale R. Hershey; Gary L. Grossnickle, Chairman; Fred N. West, Vice Chairman; M. Wayne Lambertson; Christopher R. Stiles; Rodger L. Wagner; Paul J. Rock; Jennifer L. Rhodes; Walter C. Hopkins.

MidAtlantic Farm Credit’s Senior Management Team(above, left to right): Lloyd R. Webb; Jeffrey M. Tyson; John E. Wheeler, Jr.; Linda K. Stum; J. Robert Frazee, President and CEO; Sandra L. Wieber; Carl E. Naugle; Laura E. Bailey; Thomas J. Marshall; Thomas H. Truitt,Jr.; James D. Aird; Tammy L. Price.

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MidAtlantic Farm Credit, ACA 45 Aileron Court Westminster, MD 21157

PRSRT STD U.S. POSTAGE

PAIDBALTIMORE, MD PERMIT NO. 7175

mafc.com

Meet Our Founding Fathers

Ninety-five years ago, President Woodrow Wilson signed the Federal Farm Loan Act, which created what is known today as the Farm Credit System.

President Wilson knew then what we all know now: that agriculture is a unique business, and it requires a unique lender. A strong, stable lender, one that will be here for the long haul.

We’ve been here for almost 100 years. And we don’t plan on going anywhere. So take some “fatherly” advice: call your local Farm Credit office today.

Lending support to rural AmericaTM

888.339.3334

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2011 Annual Report

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