BUSINESS SEGMENT REPORTING

Management has determined that the Corporation's operations consist of three reportable segments – Farm & Ranch, USDA Guarantees 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 operating segments, a corporate segment is presented. That segment represents activity in Farmer Mac's liquidity 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 December 31, 2012, Farmer Mac II LLC held assets with a fair value of $1.7 billion, had debt outstanding of $328.0 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 years ended December 31, 2012, 2011, and 2010:



Core Earnings by Business Segment
For the Year Ended December 31, 2012
	Farm & Ranch			USDA Guarantees			Rural Utilities			Corporate			Reconciling Adjustments				GAAP Amounts
	(in thousands)
Interest income (1)	$	131,714		$	56,815		$	63,243		$	24,729		$	(11,831	)		$	264,670
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income	(1,659		)	—			—			—			1,659				—
Interest expense (2)	(65,460		)	(45,560		)	(50,796		)	(6,469		)	25,595				(142,690		)
Net effective spread	64,595			11,255			12,447			18,260			15,423				121,980
Guarantee and commitment fees	22,095			163			4,364			—			(1,659		)		24,963
Other income/(expense) (3)	2,427			599			466			(2,113		)	(22,607		)		(21,228		)
Non-interest income/(loss)	24,522			762			4,830			(2,113		)	(24,266		)		3,735

Provision for loan losses	(3,691		)	—			—			—			—				(3,691		)

Release of losses	1,816			—			—			—			—				1,816
Other non-interest expense	(15,066		)	(3,065		)	(5,809		)	(8,784		)	—				(32,724		)
Non-interest expense (4)	(13,250		)	(3,065		)	(5,809		)	(8,784		)	—				(30,908		)
Core earnings before income taxes	72,176			8,952			11,468			7,363			(8,843		)	(5)	91,116
Income tax (expense)/benefit	(25,261		)	(3,134		)	(4,013		)	7,157			3,095				(22,156		)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	46,915			5,818			7,455			14,520			(5,748		)	(5)	68,960
Preferred stock dividends	—			—			—			(2,879		)	—				(2,879		)
Non-controlling interest - preferred stock dividends	—			—			—			(22,187		)	—				(22,187		)
Segment core earnings	$	46,915		$	5,818		$	7,455		$	(10,546	)	$	(5,748	)	(5)	$	43,894

Total assets at carrying value	$	5,190,136		$	1,641,030		$	2,398,809		$	3,392,226		$	—			$	12,622,201
Total on- and off-balance sheet program assets at principal balance	9,056,489			1,615,579			2,343,120			—			—				13,015,188


(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 not designated as hedges, which are included in "Losses on financial derivatives and hedging activities" on the GAAP financial statements.

(3)

Includes reconciling adjustments for the reclassification of yield maintenance income and expenses related to interest rate swaps not designated as hedges and fair value adjustments on 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 Year Ended December 31, 2011
	Farm & Ranch			USDA Guarantees			Rural Utilities			Corporate			Reconciling Adjustments				GAAP Amounts
	(in thousands)
Interest income (1)	$	146,653		$	56,726		$	53,237		$	28,117		$	(10,046	)		$	274,687
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income	(3,269		)	—			—			—			3,269				—
Interest expense (2)	(92,155		)	(45,937		)	(40,950		)	(13,003		)	38,663				(153,382		)
Net effective spread	51,229			10,789			12,287			15,114			31,886				121,305
Guarantee and commitment fees	22,525			204			5,361			—			(3,269		)		24,821
Other income/(expense) (3)	3,201			283			—			(2,272		)	(73,422		)		(72,210		)
Non-interest income/(loss)	25,726			487			5,361			(2,272		)	(76,691		)		(47,389		)

Provision for loan losses	(610		)	—			—			—			—				(610		)

Release of losses	2,957			—			—			—			—				2,957
Other non-interest expense	(15,768		)	(2,752		)	(4,923		)	(8,173		)	—				(31,616		)
Non-interest expense (4)	(12,811		)	(2,752		)	(4,923		)	(8,173		)	—				(28,659		)
Core earnings before income taxes	63,534			8,524			12,725			4,669			(44,805		)	(5)	44,647
Income tax (expense)/benefit	(22,237		)	(2,983		)	(4,454		)	8,195			15,682				(5,797		)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	41,297			5,541			8,271			12,864			(29,123		)	(5)	38,850
Preferred stock dividends	—			—			—			(2,879		)	—				(2,879		)
Non-controlling interest - preferred stock dividends	—			—			—			(22,187		)	—				(22,187		)
Segment core earnings	$	41,297		$	5,541		$	8,271		$	(12,202	)	$	(29,123	)	(5)	$	13,784

Total assets at carrying value	$	4,840,519		$	1,552,105		$	2,421,904		$	3,068,980		$	—			$	11,883,508
Total on- and off-balance sheet program assets at principal balance	8,057,027			1,513,177			2,343,098			—			—				11,913,302


(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 "Losses on financial derivatives and hedging activities" 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.



Core Earnings by Business Segment
For the Year Ended December 31, 2010
	Farm & Ranch			USDA Guarantees			Rural Utilities			Corporate			Reconciling Adjustments				GAAP Amounts
	(in thousands)
Interest income (1)	$	109,220		$	55,129		$	56,072		$	27,497		$	(9,207	)		$	238,711
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income	(4,627		)	—			—			—			4,627				—
Interest expense (2)	(71,147		)	(45,076		)	(44,207		)	(16,384		)	34,146				(142,668		)
Net effective spread	33,446			10,053			11,865			11,113			29,566				96,043
Guarantee and commitment fees	22,270			458			5,990			—			(4,627		)		24,091
Other income/(expense) (3)	3,389			299			1			(1,711		)	(21,095		)		(19,117		)
Non-interest income/(loss)	25,659			757			5,991			(1,711		)	(25,722		)		4,974

Provision for loan losses	(1,893		)	—			—			—			—				(1,893		)

Provision for losses	(2,417		)	—			—			—			—				(2,417		)
Other non-interest expense	(15,430		)	(2,796		)	(4,335		)	(7,649		)	—				(30,210		)
Non-interest expense (4)	(17,847		)	(2,796		)	(4,335		)	(7,649		)	—				(32,627		)
Core earnings before income taxes	39,365			8,014			13,521			1,753			3,844			(5)	66,497
Income tax (expense)/benefit	(13,778		)	(2,805		)	(4,733		)	8,864			(1,345		)		(13,797		)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	25,587			5,209			8,788			10,617			2,499			(5)	52,700
Preferred stock dividends	—			—			—			(4,129		)	—				(4,129		)
Non-controlling interest - preferred stock dividends	—			—			—			(20,707		)	—				(20,707		)
Loss on retirement of preferred stock	—			—			—			—			(5,784		)		$	(5,784	)
Segment core earnings	$	25,587		$	5,209		$	8,788		$	(14,219	)	$	(3,285	)	(5)	$	22,080

Total assets at carrying value	$	2,800,367		$	1,378,265		$	2,727,332		$	2,573,950		$	—			$	9,479,914
Total on- and off-balance sheet program assets at principal balance	8,188,628			1,385,398			2,642,683			—			—				12,216,709


(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 "Losses on financial derivatives and hedging activities" on the GAAP financial statements.

(3)


(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.