Business Segment Reporting

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements [Abstract]

Business Segment Reporting

9. BUSINESS SEGMENT REPORTING

Management has determined that the Corporation's operations consist of three reportable segments – Farmer Mac I, Farmer Mac II and Rural Utilities.  Farmer Mac uses these three segments to generate revenue and manage business risk, and each segment is based on distinct products and distinct business activities.  In addition to these three program operating segments, a corporate segment is presented.  That segment represents activity in Farmer Mac's non-program investment portfolio and other corporate activities.  The segment financial results include directly attributable revenues and expenses.  Corporate charges for administrative expenses that are not directly attributable to an operating segment are allocated based on headcount.

Farmer Mac uses core earnings to measure corporate economic performance and develop financial plans because, in management's view, core earnings is a useful alternative measure in understanding Farmer Mac's economic performance, transaction economics and business trends.  Core earnings differs from GAAP net income by excluding the effects of fair value accounting guidance, which are not expected to have a permanent effect on capital. Core earnings also differs from GAAP net income by excluding specified infrequent or unusual transactions that Farmer Mac believes are not indicative of future operating results and that may not reflect the trends and economic financial performance of the Corporation's core business. This non-GAAP financial measure may not be comparable to similarly labeled non-GAAP financial measures disclosed by other companies.

The financial information presented below reflects the accounts of Farmer Mac and its subsidiaries on a consolidated basis.  Accordingly, the core earnings for Farmer Mac's reportable operating segments will differ from the stand-alone financial statements of Farmer Mac's subsidiaries.  These differences will be due to various factors, including the reversal of unrealized gains and losses related to fair value changes of trading assets and financial derivatives, as well as the allocation of certain expenses such as dividends and interest expense related to the issuance of capital and the incurrence of indebtedness managed at the corporate level.  The allocation of general and administrative expenses that are not directly attributable to an operating segment may also result in differences.  The assets of Farmer Mac's subsidiary, Farmer Mac II LLC, will only be available to creditors of Farmer Mac after all obligations owed to creditors of and equity holders in Farmer Mac II LLC have been satisfied.  As of March 31, 2012, Farmer Mac II LLC held assets with a fair value of $1.6 billion, had debt outstanding of $242.0 million, had preferred stock outstanding with a liquidation preference of $250.0 million, and had $1.0 billion of common stock outstanding held by Farmer Mac.

The following tables present core earnings for Farmer Mac's reportable operating segments and a reconciliation to GAAP net income for the three months ended March 31, 2012 and 2011: 

Core Earnings by Business Segment
For the Three Months Ended March 31, 2012
	Farmer Mac I			Farmer Mac II			Rural Utilities			Corporate			Reconciling Adjustments				GAAP Amounts
	(in thousands)
Interest income (1)	$	40,746		$	14,315		$	13,496		$	6,232		$	(1,658	)		$	73,131
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income	(730		)	—			—			—			730				—
Interest expense (2)	(25,142		)	(11,549		)	(10,319		)	(1,416		)	9,503				(38,923		)
Net effective spread	14,874			2,766			3,177			4,816			8,575				34,208
Guarantee and commitment fees	5,323			47			1,290			—			(730		)		5,930
Other income/(expense) (3)	437			102			1			(523		)	8,231				8,248
Non-interest income/(loss)	5,760			149			1,291			(523		)	7,501				14,178
Provision for loan losses	(420		)	—			—			—			—				(420		)
Provision for losses	(30		)	—			—			—			—				(30		)
Other non-interest expense	(3,492		)	(764		)	(1,382		)	(2,174		)	—				(7,812		)
Non-interest expense (4)	(3,522		)	(764		)	(1,382		)	(2,174		)	—				(7,842		)
Core earnings before income taxes	16,692			2,151			3,086			2,119			16,076			(5)	40,124
Income tax (expense)/benefit	(5,842		)	(753		)	(1,080		)	1,647			(5,626		)		(11,654		)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	10,850			1,398			2,006			3,766			10,450			(5)	28,470
Preferred stock dividends	—			—			—			(720		)	—				(720		)
Non-controlling interest - preferred stock dividends	—			—			—			(5,547		)	—				(5,547		)
Segment core earnings	$	10,850		$	1,398		$	2,006		$	(2,501	)	$	10,450		(5)	$	22,203
Total assets at carrying value	$	5,019,070		$	1,567,693		$	2,314,162		$	3,410,486		$	—			$	12,311,411
Total on- and off-balance sheet program assets at principal balance	8,283,483			1,529,642			2,253,300			—			—				12,066,425

(1) Includes reconciling adjustments for yield maintenance income and amortization of premiums on assets consolidated at fair value to reflect core earnings amounts.

(2) Based on effective funding cost determined for each operating segment, including expenses related to interest rate swaps, which are included in Gains on financial derivatives on the GAAP financial statements.

(3) Includes reconciling adjustments for the reclassification of yield maintenance income and expenses related to interest rate swaps and fair value adjustments on loans held for sale, financial derivatives and trading assets. Also includes a reconciling adjustment related to the recognition of deferred gains over the estimated lives of certain Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities.

(4) Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.

(5) Net  adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends; and segment core earnings to corresponding GAAP measures: income before income taxes, net income, and net income attributable to common stockholders, respectively.

Core Earnings by Business Segment
For the Three Months Ended March 31, 2011
	Farmer Mac I			Farmer Mac II			Rural Utilities			Corporate			Reconciling Adjustments				GAAP Amounts
	(in thousands)
Interest income (1)	$	32,079		$	13,665		$	13,662		$	7,187		$	(2,521	)		$	64,072
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income	(874		)	—			—			—			874				—
Interest expense (2)	(20,278		)	(10,998		)	(10,660		)	(4,140		)	9,023				(37,053		)
Net effective spread	10,927			2,667			3,002			3,047			7,376				27,019
Guarantee and commitment fees	5,765			53			1,443			—			(874		)		6,387
Other income/(expense) (3)	962			46			—			(94		)	7,746				8,660
Non-interest income/(loss)	6,727			99			1,443			(94		)	6,872				15,047
Provision for loan losses	(1,281		)	—			—			—			—				(1,281		)
Release of losses	1,934			—			—			—			—				1,934
Other non-interest expense	(4,768		)	(663		)	(1,132		)	(2,049		)	—				(8,612		)
Non-interest expense (4)	(2,834		)	(663		)	(1,132		)	(2,049		)	—				(6,678		)
Core earnings before income taxes	13,539			2,103			3,313			904			14,248			(5)	34,107
Income tax (expense)/benefit	(4,739		)	(736		)	(1,160		)	2,105			(4,987		)		(9,517		)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	8,800			1,367			2,153			3,009			9,261			(5)	24,590
Preferred stock dividends	—			—			—			(720		)	—				(720		)
Non-controlling interest - preferred stock dividends	—			—			—			(5,547		)	—				(5,547		)
Segment core earnings	$	8,800		$	1,367		$	2,153		$	(3,258	)	$	9,261		(5)	$	18,323
Total assets at carrying value	$	3,354,391		$	1,393,444		$	2,300,792		$	2,906,985		$	—			$	9,955,612
Total on- and off-balance sheet program assets at principal balance	8,197,947			1,402,831			2,235,522			—			—				11,836,300

(1) Includes reconciling adjustments for yield maintenance income and amortization of premiums on assets consolidated at fair value to reflect core earnings amounts.

(2) Based on effective funding cost determined for each operating segment, including expenses related to interest rate swaps, which are included in Gains on financial derivatives on the GAAP financial statements.

(3) Includes reconciling adjustments for the reclassification of yield maintenance income, expenses related to interest rate swaps and fair value adjustments on loans held for sale, financial derivatives and trading assets. Also includes a reconciling adjustment related to the recognition of deferred gains over the estimated lives of certain Farmer Mac II Guaranteed Securities and USDA Guaranteed Securities.

(4) Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.

(5) Net  adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends; and segment core earnings to corresponding GAAP measures: income before income taxes, net income, and net income attributable to common stockholders, respectively.